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THE  MACMILLAN  COMPANY 

NEW  YORK    •    BOSTON   •    CHICAGO  •    DALLAS 
ATLANTA  •    SAN   FRANCISCO 

MACMILLAN  &  CO.,  Limited 

LONDON  •  BOMBAY  •  CALCUTTA 
MELBOURNE 

THE  MACMILLAN  CO.  OF  CANADA,  Ltd. 

TORONTO 


INTERNATIONAL  TRADE 


A   STUDY   OF 

THE   ECONOMIC   ADVANTAGES 

OF   COMMERCE 


BY 


HARRY   GUNNISON    BROWN 

ASSISTANT   PROFESSOR   OK   ECONOMICS    IN   THE   UNIVERSITY 
OF    MISSOURI 


NrfB    g  Otfe 

THE   MACMILLAN   COMPANY 

1920 

All  rights  reserved 

3SLH 


Copyright,  1914, 
By  THE  MACMILLAN  COMPANY. 


J.  S.  Cushing  Co.  —  Berwick  <Sc  Smith  Co. 
Norwood,  Mass.,  U.S.A. 


1007 
i  3  31 


3 


PREFACE 

In  this  book,  originally  published  as  Part  II  of  my 
International    Trade  and  Exchange,   I   have  aimed  to 
cover  the   general   theory   of  international   trade   and 
government  interference  with   such  trade.     The  book 
<      begins  with  a  discussion  of  the  gains  of  trade,  whether 
f        the  trade  is  between  countries  or  wholly  within  a  single 
country.     Attention  is  then  turned  to  the  conditions  de- 
termining the  share  which  each  of  two  or  more  countries 
»       gets  from  trade  between  them.     The  remainder  of  the 
book  is  devoted  to  a  consideration  of  revenue  tariffs, 
bounties,  navigation  acts,  government  construction  of 
canals  for  the  free  use  of  commercial  interests,   land 
*i      grants  in  encouragement  of  railroad  building,  etc.     Pro- 
b      posals  for  such  indirect  encouragement  to  commerce  as 
^      is  afforded  by  the  last  two  policies,  are  perhaps  no  less 
^      frequent  and  insistent  than  are  proposals  for  its  direct 
encouragement  by  means  of  bounties  or  for  its  discour- 
agements by  means  of  protective  tariffs.     Analysis  of 
the  effects  to  be  expected  from  such  policies  may  be  as 
important,  therefore,  as  analysis  of  the  effects  of  a  pro- 
tective tariff  or  bounty  system. 

I  have  presented  the  subjects  of  international  trade, 
protective  tariffs,  etc.,  in  terms  of  money  prices  as  well 
as  more  generally.  To  many  students,  accustomed  to 
think  in  terms  of  money  prices,  even  in  terms  of  mer- 
cantilism, such  a  method  of  presentation  may  be  the 


'-. 


vi  PREFACE 

only  convincing  one.  In  the  case  of  protective  tariffs, 
not  only  is  it  shown  in  a  general  way  that  protection 
tends  to  divert  a  country's  industry  out  of  its  natural 
channels,  but,  in  addition,  the  effects  of  protection  on 
national  wealth  are  traced  by  showing  that  money  prices 
are  raised  by  this  policy  more  than  are  average  money 
incomes.  It  is  pointed  out  that  the  tariff  has  two  effects 
on  prices,  primary  and  secondary.  In  the  first  place, 
the  prices  of  protected  goods  are  directly  raised  by  the 
tariff,  because  of  the  exclusion  of  cheaper  foreign  goods. 
This  rise  applies  only  to  protected  goods,  not  to  money 
incomes.  Next,  protection,  since  it  decreases  imports, 
increases  the  quantity  of  money  in  the  protectionist 
country  ;  and  this  increase  of  money  brings  a  secondary 
rise  of  prices  affecting  protected  goods,  unprotected 
goods  and  money  incomes.  The  rise  of  money  incomes 
compensates  for  the  secondary  rise  of  general  prices 
but  does  not  compensate  for  the  original  rise  of  prices  of 
the  protected  goods.  Therefore,  average  prosperity  is 
decreased.  In  the  same  way,  the  effects  of  protection 
on  wages  and  on  land  rent  are  set  forth  in  general  terms 
and  in  terms  of  money  prices. 

Throughout,  I  have  endeavored  to  keep  in  view  the 
requirement  of  clearness,  although  not  avoiding  discus- 
sion of  difficult  points.  To  this  end,  concreteness  has 
been  given  to  the  arguments  presented,  by  the  use  of 
both  hypothetical  and  real  examples ;  and  the  main  con- 
clusions of  each  chapter  have  been  summarized  in  the 
last  section  of  the  chapter.  The  more  analytical  and 
controversial  discussions  have  been,  in  large  part,  con- 
signed to  footnotes.  I  have  sought  thus  to  write  a  book 
which  can  serve  as  a  text,  but  which  may  be  also  not 
without  interest,  on  a  few  disputed  points,  to  profes- 
sional economists. 


PREFACE  vii 

Acknowledgment  should  be  here  made  of  various 
courtesies  extended,  and  of  the  aid  rendered  by  a  num- 
ber of  friends  who  have  done  much  toward  removing 
errors  of  statement  and  expression  and  in  suggesting 
critical  and  illustrative  additions.  Professor  G.  S.  Cal- 
lender,  of  the  Sheffield  Scientific  School,  Yale  Univer- 
sity, to  whom  I  submitted  the  manuscript,  has  made  a 
number  of  valuable  criticisms  and  suggestions.  I  am 
under  obligation,  also,  for  critical  reading  of  a  number 
of  the  more  important  chapters  of  the  book,  to  Pro- 
fessors Irving  Fisher,  Clive  Day,  and  H.  C.  Emery  of 
Yale  College  and  to  Professor  John  Bauer  of  Cornell 
University.  Finally,  I  would  acknowledge  here  the 
obligation  I  am  under  to  my  wife,  who  has  given  me 
valuable  assistance  in  the  gathering  of  data,  in  reading 
and  criticising  the  manuscript  in  its  various  stages  of 
completion,  and  in  correcting  the  proof. 

HARRY   GUNNISON   BROWN. 

Milford,  Connecticut, 


CONTENTS 

PAGES 

Chapter  I  —  Prices,  Intercommunity  Trade,  and    the 

Gains  of  Trade 3-18 

§  1.    The  Relation  of  Prices  in  One  Country  to  Prices  in 

Another 
§  2.   What  Prices  Tend  to  be  Lower  in  a  Given  Country, 

than  Prices  of  the  Same  Kinds  of  Goods  in  Another 

Country 
§  3.    Trade  between  Two  Communities  when  Each  has  an 

Absolute  Advantage  over  the  Other,  in  One  or  More 

Lines  of  Production 
§  4.    Trade  between  Two  Communities  or  Countries  when 

One  is  More  Productive  than  the  Other  in  Several  or 

in  All  Lines,  but  has  a  Greater  Advantage  in  One 

Line  or  in  a  Few  Lines,  than  in  the  Rest 
§  5.    Summary 

Chapter  II  —  The  Rate  of  Interchange  of  Goods  be- 
tween Communities !9-38 

§  I.  The  Limits  to  the  Rate  at  which  the  Goods  of  One 
Country  Exchange  for  Those  of  Another 

§  2.  Conditions  of  Supply  and  Demand  Determining  the 
Exact  Rate  of  Interchange  between  these  Limits 

§  3.  Effect  on  this  Rate,  when  One  of  the  Countries  Offers 
a  Variety  of  Goods  in  Trade,  and  also  when  it 
Receives  Periodic  Payments  of  Obligations  from  the 
Other 

§  4.  Influence  on  Trade  and  the  Rate  of  Trade  of  Produc- 
tion in  any  Country  under  Conditions  of  Different 
Cost 

§  5.  Extention  of  Hypothesis  so  as  to  Include  Trade  In- 
volving More  than  Two  Countries 

§  6.    Cost  of  Transportation  as  Related  to  Trade 

§  7.    Summary 


x  CONTENTS 

FACES 

Chapter  III  —  The  Incidence  of  Tariffs  for  Revenue  39-56 
§  1.    Revenue  and  Protective  Tariffs  Distinguished 
§  2.    When  the  Burden  of  an  Import  Duty  Levied  for  Rev- 
enue is  Borne  by  the  Levying  Country 
§  3.    When    the    Burden    of   an    Import    Duty    Levied   for 
Revenue    is    Shifted    by    the    Levying   Country   to 
Another  or  to  Other  Countries 
§  4.   The  Ultimate  Incidence  of  a  Revenue  Duty  on  Exports 
§  5.    Summary 

Chapter  IV  —  The  Effect  of  a  Protective  Tariff  on 

National  Wealth 57-85 

§  1 .  The  Effect  of  a  Protective  Tariff  on  a  Country's  Export 
Trade 

§  2.  How  a  Protective  Tariff  Sets  up  Unprofitable  Indus- 
tries at  the  General  Expense 

§  3.  The  Effect  of  Protection  on  the  Money  Prices  of  Pro- 
tected Goods  and  on  the  Money  Prices  of  Unpro- 
tected Goods 

§  4.  Protection  to  Industries  in  which  Large  Scale  Produc- 
tion is  Advantageous 

§  5.    Protection  to  Industries  of  Increasing  Cost 

§  6.  Effect  of  a  Country's  Protective  Tariff  System  on  the 
Cost  to  it  of  Unprotected  Goods  Got  from  Other 
Countries 

§  7.  A  Tariff  "  Equal  to  the  Difference  in  Cost  of  Produc- 
tion at  Home  and  Abroad,  together  with  a  Reason- 
able Profit " 

§  8.  Relative  Advantages  in  the  World's  Commerce  of 
Countries  having  High  and  Countries  having  Low  or 
No  Tariffs 

§  9.    Summary 

Chapter  V  —  The  Effects  of  Protection  on  the  Dis- 
tribution of  National  Wealth  among  Economic 
Classes  and  Among  Territorial  Sections  .     86-115 

§  1.    Effect  of  Protection  on  the  Rate  of  Interest  and  There- 
fore on  Wages 
§  2.    Brief  Statement  of  Laws  of  Wages  and  Land  Rent 


CONTENTS  xi 

PAGES 

§  3.  The  Effect  of  Protection  on  Wages  when  Protected 
and  Unprotected  Goods  are  Produced  in  the  Pro- 
tectionist Country,  under  Conditions  of  Substantially 
Constant  Cost 

§  4.  The  Effect  of  Protection  on  Wages  and  Rent  when 
the  Protected  Goods  are  Produced  under  Conditions 
of  Sharply  Increasing  Cost 

§  5.  The  Effect  of  Protection  on  Wages  and  Rent  when 
Unprotected  Goods  are  Produced  under  Conditions 
of  Sharply  Increasing  Cost 

§  6.  How  Protection  May  Benefit  One  Section  of  a  Coun- 
try at  the  Expense  of  Other  Sections 

§  7.    Protection  as  an  Encouragement  to  Monoply 

§  8.    Summary 

Chapter  VI  —  A  Consideration  of  Some  Special  Argu- 
ments for  Protection 1 16-143 

§  I.  The  Argument  that  Protection  is  Desirable  Because 
it  Keeps  Money  in  the  Protected  Country 

§  2.    The  Wages  Argument  for  Protection 

§  3.    The  Make-Work  Argument  for  Protection 

§  4.    The  Home  Market  Argument  for  Protection 

§  5.  The  Argument  for  Protection  to  Agriculture  in  the 
Older  Countries,  against  a  Future  when  Cheap  Foods 
and  Raw  Material  may  not  be  Obtainable  from  the 
Newer  Countries 

§  6.    The  Infant  Industry  Argument  for  Protection 

§  7.  The  Argument  that  a  Protective  Policy  should  be 
Followed  in  Order  to  Diversify  Industry 

§  8.  The  Argument  that  Protection  should  be  Applied  as 
a  Means  of  Getting  and  Maintaining  a  Certain  Degree 
of  National  Self-sufficiency 

§  9.    Free  Trade  within  the  United  States 

§  10.  Ethical  Considerations  Bearing  on  the  Policy  of 
Protection 

§  11.    Summary 

Chapter  VII  —  The  Nature  and  Effects  of  Boun- 
ties               144-154 

§  1.  Bounties  as  Compared  and  Contrasted  with  Protec- 
tion 


xii  CONTENTS 

PAG 

§  2.  The  Various  Possible  Effects  of  Bounties  on  the  Level 
of  Prices 

§  3.  The  Various  Possible  Effects  of  Bounties  on  the  Gen- 
eral Welfare  in  the  Bounty-paying  Country  and  in 
the  Countries  with  which  it  Trades 

§  4.  The  Various  Possible  Effects  of  Bounties  on  Wages 
and  Rent 

§  5.  Why  Bounties  may  be  Less  Objectionable  than  Protec- 
tion if  Encouragement  of  Infant  Industries  is  in  any 
Case  to  be  Attempted 

§  6.    Summary 

Chapter  VIII  —  Uneconomical  Government  Interfer- 
ence with,  and  Encouragement  of,  Transpor- 
tation          I55-1^ 

§'l.    Navigation  Laws 

§  2.    Subsidies  to  Native  Shipping 

§  3.  Indirect  Subsidies,  Favoring  Native  Ships  as  Com- 
pared with  Foreign  Ships 

§  4.  The  Free  Use  for  Navigation  of  Government-built 
Canals 

§  5.   The  Improvement  of  Harbors 

§  6.    The  Improvement  of  Rivers 

§  7.    Subsidies  to  Railroad  Building 

§  8.    Summary 


PART   II 
THE  ECONOMIC   ADVANTAGES  OF  COMMERCE 


CHAPTER  I 

Prices,  Intercommunity  Trade,  and  the  Gains  of 

Trade 

§i 

The  Relation  of  Prices  in  One  Country  to  Prices  in  Another 

Through  the  influence  of  trade,  the  price  in  any- 
country  of  any  special  kind  of  goods  tends  toward 
equality  with  the  price  of  the  same  goods  in  other  coun- 
tries with  which  the  first  one  trades.  Cost  of  carriage, 
of  course,  must  enter  into  the  selling  price  of  any  kind 
of  goods.  Due  to  the  natural  productivity  of  land, 
greater  efficiency  of  labor,  better  capital  equipment,  or 
other  cause,  some  goods  will  probably  be  produced  with 
less  relative  cost  in  one  country  than  in  the  others  trading 
with  it.  These  goods  will  tend  to  be  cheaper  in  the 
country  having  such  an  advantage,  and  to  be  sold  by  it 
to  the  others.  The  price  of  such  goods  in  the  other 
countries  cannot,  for  any  length  of  time,  be  higher  than 
in  the  exporting  country  by  much  more  than  the  expense 
of  transportation  or,  if  trade  is  restricted,  the  expense  of 
transportation  plus  tariff  charges  ;  for  if  the  price  is  much 
higher,  none  of  the  goods  in  question  will  be  sold  in  the 
country  where  they  are  produced,  until  enough  has  been 
sent  abroad  to  more  nearly  equalize  prices.  Neither  can 
the  price  abroad  of  goods  produced  under  competitive 
conditions,  be  less  than  the  price  in  the  producing  country 

3 


4       ECONOMIC  ADVANTAGES  OF  COMMERCE 

plus  cost  of  transportation  and  tariffs,  if  any  of  the  goods 
at  all  are  sent  abroad.1 

To  illustrate,  suppose  a  certain  kind  of  cloth  to  be 
selling  at  wholesale  in  England  for  (the  equivalent  in 
English  money  of)  $i  per  yard.  Assuming  a  transporta- 
tion and  tariff  expense  of  50  cents  a  yard,  it  would  sell 
in  Canada,  wholesale,  for  $1.50.  Suppose,  next,  that 
the  Canadian  demand  raised  the  Canadian  price  to 
$1.75  per  yard.  If  the  carrying  and  tariff  costs  remained 
at  50  cents,  and  the  Canadian  price  $1.75,  obviously  no 
one  would  sell  the  cloth  in  England  for  much  less  than 
$1.25.  If,  on  the  other  hand,  the  Canadian  demand 
should  decrease  so  that  the  cloth  could  not  be  sold 
in  Canada  for  more  than  $1.25,  then  none  of  this 
cloth  would  be  sent  from  England  to  Canada  unless 
the  English  price  fell  to  $0.75.  If,  because  the 
whole  supply  had  to  be  sold  in  England,  the  price 
should  fall  to  $0.75  per  yard,  a  surplus  might  be  ex- 
ported. Otherwise,  it  would  pay  better  to  sell  all  the 
cloth  in  England. 

It  will  be  seen  that  the  general  level  of  prices  in  one 
country  is  not  by  any  means  necessarily  the  same  as  the 
price  level  in  the  other  countries  with  which  it  trades. 
If  we  imagine  two  countries  side  by  side,  with  no  tariff 
barriers  between  them,  and  with  a  zero  cost  of  transpor- 
tation from  any  part  of  one  to  any  section  of  the  other, 
we  may  say  that  the  price  of  each  commodity  in  one 
country  must  equal,  measured  in  the  same  standard  of 
value,  its  price  in  the  other.     Obviously,  if  all  prices 

1  Except  as  goods  may  be  sold  cheaper  abroad  temporarily  in  order  to  de- 
velop new  business,  and  for  other  special  reasons  of  very  limited  application. 
A  tariff  protected  monopoly  will  purposely  limit  its  sales  at  home  in  order  to 
realize  monopoly  profits,  while  selling  abroad,  where  competition  must  be  met, 
at  competitive  prices. 


INTERCOMMUNITY  TRADE  5 

are  exactly  the  same,  then  the  general  average,  the  level 
of  prices,  must  be  exactly  the  same  in  one  country  as 
in  the  other.  In  comparing  the  price  levels  of  two 
countries,  we  may  take  as  a  unit  that  amount  of  each 
kind  of  goods,  in  one  of  the  countries,  which  sells  for  $1 
(or  £1  or  some  other  standard  monetary  unit).  The 
average  price  in  that  country  will  be  $1.  We  may  then 
learn  the  price  in  the  other  country,  of  each  such  unit 
amount  of  goods,  and  take  the  average  of  these  prices. 
This  gives  us  the  general  level  of  prices  in  the  second 
country  as  compared  with  that  of  the  first.1  The  most 
satisfactory  average  is,  of  course,  a  weighted  one,  i.e. 
an  average  in  which  each  kind  of  goods  is  given  an  im- 
portance consistent  with  the  proportionate  value  of  it 
sold.  By  the  method  of  averaging  here  described,  it  is 
obvious  that,  given  costless  transfer  of  all  goods  and 
services,  the  average  price  or  price  level  in  the  one  coun- 
try would  equal  the  average  in  the  other ;  for  all  prices 
would  be  exactly  the  same  in  each,  and  an  average, 
weighted  or  unweighted,  must  be  the  same. 

As  it  is,  however,  the  goods  which  are  the  special 
product  of  each  country  tend  to  be  lower  in  that  country, 
and  to  be  higher  in  other  countries,  by  an  amount  equal 
to  the  cost  of  transportation  and  other  obstacles  in  the 
way  of  trade.  This  makes  it  unlikely  that  the  average 
of  prices  in  one  country  will  be  the  same  as  the  average 
in  another  country.  Thus,  wheat  may  be  lower  in  price 
in  Canada  than  in  England  by  the  cost  of  transporta- 
tion. At  the  same  time,  cotton  cloth  may  be  lower  in 
price  in  England  by  the  cost  of  transportation.    There 

1  Cf.  Fisher's  suggestion  for  comparing  the  price  levels  in  the  same  country 
for  two  or  more  years,  Elementary  Principles  of  Economics,  New  VTork  (Macmil- 
lan),  1912,  p.  250. 


6       ECONOMIC  ADVANTAGES  OF  COMMERCE 

is  no  logical  reason  for  assuming  that  the  average  of 
prices  (the  level  of  prices)  is  the  same.  The  lower  priced 
wheat,  in  Canada,  may  conceivably  have  so  great  an 
importance  as  to  make  the  weighted  average  of  prices 
lower  there,  despite  the  higher  relative  price  of  cotton 
cloth.  Or  cotton  cloth,  cutlery,  shoes,  and  machinery, 
all  lower  in  England,  may  make  average  prices  lower 
there  even  though  wheat  is  lower  in  Canada.  Or  again, 
though  many  articles  may  be  lower  in  price  in  England, 
yet  these  may  be  for  the  most  part  such  things  as  houses, 
practically  non-transportable,  or  goods  transportable 
only  at  such  great  expense  as  generally  not  to  be  trans- 
ported. A  few  things  may  be  lower  in  Canada  by  enough 
to  pay  for  shipment  to  England.  Under  these  circum- 
stances, average  prices  will  certainly  be  lower  in  England 
although  trade  may  be  in  perfect  equilibrium.  A  dollar 
(or  its  mint  equivalent  in  English  money)  will  buy  more 
in  England,  yet  Canadian  money  will  not  flow  to  Eng- 
land for  goods  transportable  at  great  expense,  in  any 
larger  quantity  than  English  money  will  flow  to  Canada 
for  a  few  goods  only  slightly  cheaper  in  Canada  but 
easily  transported.  Wheat  may  be  enough  lower  in 
Canada  to  pay  for  export,  and  cotton  cloth  enough  lower 
in  England.  Everything  else  may  be  lower  in  Eng- 
land, yet  not  enough  lower  for  shipment  to  Canada. 
If  this  is  the  situation,  the  general  level  of  prices  in 
England  must  be,  and  must  remain,  lower  than  in 
Canada. 

But  though  the  price  levels  of  England  and  Canada 
are  not,  on  these  hypotheses,  the  same,  they  are  never- 
theless related.  The  level  of  prices  in  England  may  be 
continuously  lower,  but  will  be  lower  only  to  a  certain 
extent.     A  rise  of  Canadian  prices  (the  result  of  gold 


INTERCOMMUNITY  TRADE  7 

discoveries,  expansion  of  bank  credit,  inflow  of  gold 
from  the  United  States,  or  other  cause)  will  increase 
the  importations  by  Canada  from  England,  despite 
transportation  and  other  obstacles,  and  will  tend  to 
raise  English  prices  also,  thus  leaving  the  relation  between 
Canadian  and  English  prices  substantially  as  before. 
Similarly  a  rise  in  English  prices  will  affect  prices  in 
Canada ;  and  a  fall  of  prices  in  either  country  will  affect 
prices  in  the  other. 

§2 

What  Prices  Tend  to  be  Lower  in  a  Given  Country,  than 
Prices  of  the  Same  Kinds  of  Goods  in  Another 
Country 

It  is  apparent  that  prices  of  all  goods  are  not  likely 
to  be  lower  in  one  country  than  in  another  if  transporta- 
tion and  tariff  conditions  are  such  as  to  make  any  appre- 
ciable trade  profitable.  For  unless  the  cost  of  trans- 
portation, plus  other  obstacles,  is  very  great,  the  low 
prices  in  the  one  country  will  cause  flow  of  gold  in  that 
direction.  This  will  continue  until  the  price  of  some 
good  or  goods  becomes  lower  in  the  previously  high  price 
country  than  in  the  other.1  The  condition  of  equilib- 
rium will  be  realized  at  a  point  such  that  some  prices 
are  lower  in  the  one  country  and  some  lower  in  the  other. 
This  may  be  called  a  moving  equilibrium,  or  an  equi- 
librium such  that,  other  things  equal,2  about  the  same 
value  of  trade  would  flow  in  each  direction. 

1  This  principle  is  expressed  with  great  clearness  in  Taussig's  Principles  of 
Economics,  New  York  (Macmillan),  ign,  Vol.  I,  pp.  486,  487. 

2  A  gold  mining  country  may  export  a  surplus  of  gold  and  import  a  surplus 
of  other  things,  but  exports  and  imports  as  a  whole,  none  the  less,  tend  to  be 
equal.  A  country  which  has  large  investments  abroad  will  usually  import 
more  than  it  exports  of  goods  in  general.    See  Part  I,  Ch.  V,  §  7. 


8       ECONOMIC  ADVANTAGES  OF  COMMERCE 

The  conclusion  that  some  prices  will  be  lower  in  one 
country  and  some  prices  in  others,  is  true  in  principle 
even  if  the  countries  trading  have  different  monetary 
standards,  e.g.  if  one  country  has  a  gold  and  the  other 
a  paper  standard.  We  saw,  in  the  last  chapter,  that 
whatever  the  relation  or  the  non-relation  of  the  monetary 
standards  of  two  countries,  trade  might  take  place  be- 
tween them ;  and  that  the  flow  of  this  trade  in  one  direc- 
tion would  tend,  in  the  long  run,  to  equal  the  flow  in 
the  other.1  Any  tendency  to  an  excess  flow  in  one  direc- 
tion would  be  self -terminating.  When  the  position  of 
equilibrium  was  established,  some  prices  would  be  the 
lower  in  each  country  in  the  sense  that  the  money  of 
either  country  would,  through  the  process  of  gold  ship- 
ment or  through  the  mechanism  of  the  exchanges,  buy 
more  of  some  goods  in  the  other  country  than  at  home. 

What  conditions  determine  which  prices  shall  be  lower 
in  one  country  than  in  another  or  others  ?  The  answer 
is:  those  goods  are  lower  in  price  in  any  country,  for 
the  production  of  which  it  has  relatively  great  advan- 
tages. These  advantages  may  lie  in  geographical  posi- 
tion, may  depend  upon  soil  and  climate  or  the  posses- 
sion of  certain  mines  or  other  natural  resources,  or  may, 
in  certain  lines  of  activity,  depend  upon  high  acquired 
efficiency  of  labor.  Those  goods  in  the  production  of 
which  a  country  has  a  relative  advantage  and  which, 
therefore,  it  sells  at  a  low  money  price,  will,  of  course, 
assuming  trade  to  be  free,  be  the  things  it  exports.  The 
people  of  other  countries  will  avail  themselves  of  the 
opportunity  to  buy  these  goods  cheaply.  The  advan- 
tages for  producing  them  will  mean  a  large  amount  of 
labor  and  capital  specializing  in  their  production  in  the 

1  See  Part  I,  Ch.  VI,  §§  6,  7,  8,  9. 


INTERCOMMUNITY  TRADE  9 

exporting  country.  Since  the  low  prices  at  which  these 
goods  are  sold  result  from  the  relative  advantages  in 
that  country  for  their  production,  therefore  these  low 
prices  do  not  signify  that  the  industries  are  unprofitable. 
So  much  can  be  produced  with  a  given  amount  of  labor 
that,  even  at  low  prices,  the  yield  to  industry  is  high. 

Similarly,  the  existence  of  a  high  level  of  money  wages 
in  any  country,  does  not  mean  that  in  such  a  country 
some  goods  cannot  be  produced,  and  exported,  at  low 
money  cost.  The  United  States  may  have  money  wages 
twice  as  high,  per  day,  as  England.  Yet  if  the  American 
agricultural  laborer  can  produce  over  twice  as  much 
wheat  per  day,  because  of  the  extent  of  good  agricultural 
land,  as  can  be  produced  in  England  with  the  same  labor, 
then  the  money  cost  of  the  American  wheat  will  be  no 
greater  and  may  be  appreciably  less  per  bushel.  In 
selling  his  wheat  in  the  foreign  market,  the  farmer  is  not 
primarily  concerned  with  the  matter  of  how  much  he 
has  to  pay  his  men  by  the  day.  He  is  greatly  concerned 
with  the  matter  of  what  he  must  pay  them  per  bushel 
produced.  It  is  obvious,  therefore,  that  a  productive 
country  can  have  at  the  same  time  low  prices  of  goods 
which  it  exports,  and  high  wages  to  the  producers  of 
those  goods. 

Neither  is  it  essential,  in  order  for  a  country  to  export 
certain  goods  at  a  low  price,  that  it  should  be  able  to 
produce  those  goods  more  efficiently,  i.e.  with  less  labor 
expenditure,  than  other  countries.  All  that  is  neces- 
sary is  that  for  the  production  of  such  goods,  its  disad- 
vantages shall  be  less  than  for  the  production  of  other 
goods.  The  converse  of  this  proposition  is  that  all 
goods  will  not  necessarily  be  produced  at  the  lowest 
price,  in  the  country  where  they  can  be  produced  with 


io      ECONOMIC  ADVANTAGES  OF  COMMERCE 

least  labor.  Even  if  the  United  States  can  produce 
woolen  cloth  with  less  labor  expenditure  than  England, 
the  advantage  of  the  United  States  in  the  production 
of  steam  and  electric  engines  and  other  machinery,  may 
be  still  greater.  If  a  given  amount  of  labor  in  the  United 
States  will  produce  io  per  cent  more  woolen  cloth  or 
ioo  per  cent  more  engines  and  machinery  than  in 
England,  then  the  United  States  gains  more  by  produc- 
ing the  engines  and  machinery  and  importing  the  cloth. 
The  price  at  which  producers  in  the  United  States  could 
afford  to  sell  machinery,  etc.,  would  therefore  be  com- 
paratively low,  while  it  would  require  a  relatively  high 
price  of  woolen  cloth  to  induce  Americans  to  manufac- 
ture it.  On  our  assumption,  American  labor  and  capital 
can  secure  more  money,  in  the  English  market,  for  the 
product  of  a  day's  labor  in  making  machinery  than  for 
the  product  of  a  day's  labor  in  a  cloth  factory,  and  still 
undersell  English  machine  makers.  On  the  other  hand, 
English  labor  and  capital  can  get  more  money  by  selling, 
in  the  United  States,  the  product  of  a  day's  labor  in  the 
cloth  factory,  than  for  the  product  of  a  day's  labor  in 
an  English  machine  making  factory,  and  yet  undersell 
American  cloth.  If  the  United  States  is  absolutely 
more  productive  in  both  lines,  as  well  as  in  most  or  all 
others,  it  might  be  better,  economically,  for  the  people  of 
England  to  migrate  to  the  United  States.  But  so  long 
as  they  choose  to  remain  in  England,  they  will  be  better 
off  if  they  specialize  in  the  production  of  cloth. 

It  appears,  therefore,  that  under  conditions  of  entire 
free  trade,  there  would  be  a  high  degree  of  geographical 
specialization ;  and  that  each  industry  would  be  located 
where  the  facilities  for  it  were  relatively  the  best,  all 
things,   including   transportation   cost,   considered.     In 


INTERCOMMUNITY  TRADE  n 

fact,  of  course,  the  location  of  industries  is  considerably 
affected  by  tariffs.  The  higher,  and  the  greater  in 
number,  are  these  trade  restrictions,  the  more  largely 
is  industry  turned  from  its  natural  channels.  If  there 
were  a  sufficiently  high  tariff  around  the  borders  of  Maine, 
cotton  could  perhaps  be  raised  in  Maine  hothouses. 
Similarly,  a  high  tariff  levied  by  South  Carolina  on  steel 
rails  brought  in  across  its  boundaries,  might  encourage 
the  manufacture  of  steel  rails  for  use  within  the  state, 
in  the  midst  of  the  South  Carolina  rice  fields,  with  iron 
brought  from  the  Lake  Superior  ore  regions  and  coal 
imported  from  Pennsylvania. 

§3 

Trade  between  Two  Communities  when  Each  has  an  Ab- 
solute Advantage  over  the  Other,  in  One  or  More  Lines 
of  Production 

Let  us  now  illustrate  how  the  case  stands  as  to  prices 
and  gains  from  trade  when  two  communities  engage 
in  trade,  each  having  an  absolute  advantage  in  one  line 
of  activity  over  the  other.  We  shall  suppose  the  trade 
to  be  between  two  of  the  states  of  our  own  country, 
South  Dakota  and  Indiana.  South  Dakota  we  shall 
take  as  an  example  of  a  wheat-producing  section  and 
Indiana  as  an  example  of  a  corn-producing  section. 
Suppose  that  one  day's  labor  in  South  Dakota,  of  one 
man,  produces  2  bushels  of  wheat  or  1  bushel  of  corn, 
while  in  Indiana  the  same  amount  of  labor  produces  1 
bushel  of  wheat  or  2  bushels  of  corn.  Assume,  also,  no 
cost  of  transportation  and  no  tariff  interferences  with 
trade.  If  wheat  sells  in  South  Dakota  for  $1  per  bushel, 
then  a  day's  labor  in  the  wheat  fields  will  yield  $2.     No 


12      ECONOMIC  ADVANTAGES  OF  COMMERCE 

one,  therefore,  will  be  satisfied  to  produce  corn  in  South 
Dakota  for  less  than  $2  a  day.  But  since  only  1  bushel 
of  corn  can  be  produced,  $2  reward  will  necessitate 
a  price  of  $2  a  bushel.  Whatever  the  price  of  wheat, 
corn  must  sell,  if  produced  in  South  Dakota,  at  double 
that  price  per  bushel ;  and  therefore,  if  we  assume  $1 
per  bushel  for  wheat,  corn  must  sell  at  $2.  No  one 
in  South  Dakota  will  produce  it  for  appreciably  less. 
If  it  can  be  imported  for  less,  it  will  be. 

With  Indiana  the  case  is  reversed.  Corn,  by  our 
assumption,  is  produced  there  the  more  easily.  If  the 
corn  can  be  sold  for  $1  a  bushel,  it  will  give  producers 
$2  a  day.  Naturally  they  will  not  care  to  produce  wheat 
for  a  less  return,  and  therefore,  if  Indiana  is  less  adapted 
to  wheat  production,  they  must  get  a  higher  price  ($2 
a  bushel)  in  order  to  encourage  its  production  in  Indiana. 

Both  states  gain  by  the  trade.  South  Dakota  can 
produce  in  two  days'  labor,  2  bushels  of  wheat  at,  say, 
$1  per  bushel  and  1  bushel  of  corn  at  $2  a  bushel,  a  total 
of  3  bushels  or  $4  worth.  Indiana  can  produce  in  two 
days  of  labor,  1  bushel  of  wheat  at  $2  and  2  bushels  of 
corn  at  $1  a  bushel,  making  a  total  of  3  bushels  or  $4 
worth.  If  they  trade,  each  state  can  specialize.  South 
Dakota  can  produce  in  two  days  of  labor,  4  bushels  of 
wheat  at  $1  per  bushel,  or  $4  worth  ;  while  Indiana  can 
produce  with  two  days  of  labor  available,  4  bushels 
of  corn  at  $1  each  or  $4  worth.  Trade  between  the 
two  states  will  make  it  possible  (assuming  an  even  ex- 
change) for  each  state  to  get,  from  its  two  days  of  labor, 
2  bushels  of  corn  and  2  bushels  of  wheat,  instead  of 
2  of  one  cereal  and  1  of  the  other.  There  will  be  no  gain 
in  money  values.  In  either  case  the  total  is  $4  worth 
for  each  state.     But  there  will  be  a  considerable  differ- 


INTERCOMMUNITY  TRADE  13 

ence  in  what  the  money  will  buy.  In  the  case  we  have 
assumed,  money  incomes  will  be  the  same  with  the  trade 
as  without  it,1  but  the  money  "cost  of  living"  will  be 
appreciably  reduced;  $4  will  buy  a  total  of  4  bushels 
instead  of  only  3. 

It  is  clear  that,  under  our  assumed  conditions,  Dakota 
wheat  and  Indiana  corn  could  and  would  be  sold  the 
more  cheaply;  that,  therefore,  the  people  of  Indiana 
would  naturally  buy  Dakota  wheat  at  a  lower  price 
(e.g.  $1)  rather  than  Indiana  wheat  at  a  higher  (e.g.  $2), 
while  the  people  of  South  Dakota  would  choose  to  buy 
corn  from  Indiana ;  also  that  this  arrangement,  so  obvi- 
ously to  the  individual  interests  of  the  persons  concerned, 
would  make  both  states  the  richest.  Is  it  necessary 
to  point  out  that  what  is  true  as  regards  two  states,  terri- 
tories, or  sections  under  the  same  general  government, 
is  also  true  of  two  different  nations?  If  Indiana  and 
South  Dakota  gain  by  such  a  trade  when  united  as  parts 
of  one  nation  by  the  government  at  Washington,  it  is 
reasonable  to  suppose  that  they  would  gain  in  just  the 
same  way  and  to  the  same  extent  if  each  were  a  separate 
nation.  And  in  an  exactly  analogous  way,  the  United 
States  gains  by  trade  with  Canada. 

§4 

Trade  between  Two  Communities  or  Countries  when  One 
is  More  Productive  than  the  Other  in  Several  or  in  All 
Lines,  but  has  a  Greater  Advantage  in  One  Line  or  in 
a  Few  Lines  than  in  the  Rest. 

Let  us  next  illustrate  the  relations  of  money  prices, 
and  the  gains  from  trade,  when  one  country  or  community 

1  See,  however,  Ch.  IV  (of  Part  II),  §  2. 


i4     ECONOMIC  ADVANTAGES  OF  COMMERCE 

has  an  advantage  over  another  in  several  or  in  all  lines, 
but  a  greater  advantage  in  one  than  in  the  others.  As- 
sume that  in  Canada  one  man's  labor  for  a  week  will 
produce  20  bushels  of  wheat  or  14  yards  of  linen  cloth, 
while  in  Ireland,  a  week's  labor  of  one  man  will  produce 
6  bushels  of  wheat  or  10  yards  of  cloth.  Ireland  is  at 
a  disadvantage  in  both  lines,  but  her  disadvantage  is 
less  in  linen  manufacture,  and  Canada's  advantage  is 
greater  in  wheat  production.  Both  gain  if  Ireland  pro- 
duces linen  and  Canada  produces  wheat  and  they  trade. 
Without  trade,  two  weeks  of  labor  in  Canada,  equally 
divided,  would  produce  20  bushels  of  wheat  and  14  yards 
of  linen.  In  Ireland,  two  weeks  of  labor  would  produce 
6  bushels  of  wheat  and  10  yards  of  linen.  Similarly, 
four  weeks  of  labor  in  Ireland  would  produce  12  bushels 
of  wheat  and  20  yards  of  linen.  Suppose,  now,  that  they 
trade,  and  that  a  bushel  of  Canadian  wheat  buys  a 
yard  of  Irish  linen.  Then  Canada  can  produce,  in  two 
weeks,  40  bushels  of  wheat,  and,  by  trading  half  of  it 
for  linen,  have  20  bushels  plus  20  yards,  instead  of  20 
plus  14.  Ireland  can  produce  in  two  weeks  20  yards  of 
linen,  or  in  four  weeks,  40  yards.  By  trading  half  of  this 
linen  for  wheat,  Ireland  will  have  20  yards  plus  20 
bushels  instead  of  20  plus  12,  as  a  reward  for  four  weeks' 
work.  On  our  present  hypothesis,  Ireland  must  ex- 
change the  product  of  two  weeks'  work  with  the  product 
of  one  week  of  work  in  Canada,  yet  gains  more  by  so 
doing  than  can  be  gained  by  refraining  from  the  exchange 
of  goods. 

That,  in  the  absence  of  trade  restrictions  or  excessive 
cost  of  transportation,  such  trade  will  automatically 
take  place,  becomes  evident  so  soon  as  we  ask  what 
prices  will  be  charged  by  the  producers  in  each  country. 


/      -  ' 

INTERCOMMUNITY  TRADE  15 

If  Canadians  are  able  to  produce  wheat  for  $1  a  bushel 
(and,  therefore,  $20  a  week),  they  will,  of  course,  be 
unwilling  to  produce  linen  for  any  smaller  weekly  re- 
turn, i.e.  for  less  than  $20  for  14  yards,  or  $1.43  a  yard. 
If  linen  can  be  imported  from  Ireland  for  less  than 
$1.43,  say  for  $1  a  yard,  Canadian  wheat  producers 
will  buy  it  from  Ireland,  and  would-be  Canadian 
linen  manufacturers  will  find  more  profitable  employ- 
ment in  wheat  raising. 

On  the  other  hand,  Irish  producers,  if  selling  linen  to 
Canada  at  $1  a  yard,  will  be  earning  only  $10  a  week, 
though  considerably  more  than  they  could  earn  produc- 
ing 6  bushels  of  wheat  at  $1  a  bushel.  To  induce  an 
Irish  linen  worker,  under  these  circumstances,  to  enter 
wheat  production,  would  require  $10  a  week  or  $1.67 
per  bushel.  Hence,  Irish  linen  producers  will  prefer 
to  buy  wheat  in  Canada ;  and,  with  Canada  demanding 
Irish  linen,  Irish  wheat  producers  will  find  a  more  prof- 
itable occupation  in  making  linen.  As  we  have  seen,1 
it  is  altogether  probable  that  some  goods  will  be  lower 
in  price  in  each  country  than  in  the  other.  All  prices 
could  not  long  be  lower  in  either,  since  the  resulting  in- 
flow of  gold  would  raise  them.  While  there  is  no  special 
virtue  in  the  particular  prices  of  $1  a  bushel  and  $1  a 
yard  here  assumed  for  illustration,  the  conditions  of 
production  in  each  country,  as  stated  in  the  hypothesis, 
are  such  as  would  make  the  wheat  of  Canada  and  the 
linen  of  Ireland  the  cheaper  goods. 

Trade  between  nations,  as  well  as  trade  between  parts 
of  the  same  nation,  results  in  a  gain  to  both  sides,  for  it 
makes  possible  geographical  specialization  and  therefore 
a  more  productive  employment  of  the  factors  of  industry. 

1  §  2  of  this  chapter  (I  of  Part  II). 


16     ECONOMIC  ADVANTAGES  OF  COMMERCE 

In  theoretical  discussion,  international  trade  is  sometimes 
separated  from  intranational  trade,  because  of  the  fact 
that  labor  and  capital  flow,  as  a  rule,  with  greater  diffi- 
culty, from  one  nation  to  another.1  Distance  and  ex- 
pense, a  strange  government,  separation  from  old  friends 
and  old  associations,  unfamiliar  customs,  different  lan- 
guage, different  religion,  —  any  or  all  of  these  considera- 
tions may  prevent  the  free  movement  of  labor  from  one 
country  to  another.  Some  of  them  will  cause  hesitancy 
in  making  foreign  investments.  The  argument  is  that 
within  a  nation,  labor  and  capital  will  move  freely  to 
those  localities  where  they  receive  the  largest  return. 
If  Connecticut  were  more  productive  in  every  way 2 
than  Massachusetts,  then  labor  and  capital  from  Massa- 
chusetts would  flow  freely  into  Connecticut  until  condi- 
tions3 were  equalized,  until  the  greater  crowding  of 
Connecticut  and  the  less  crowding  of  Massachusetts 
in  comparison  with  resources,  made  labor  and  capital 
no  more  productive  in  the  former  than  in  the  latter  state. 
If  Massachusetts  had  superiority  in  some  lines  and 
Connecticut  in  others,  they  would  trade ;  while  if  Con- 
necticut were  superior  in  all  lines,  Massachusetts  people 
would  largely  migrate.  But  if  labor  in  the  United 
States  is  more  productive  than  in  England,  even  in  all 
lines,  most  of  the  English  people  may  nevertheless  pre- 
fer to  stay  at  home.  They  will  then  simply  produce 
those  things  in  which  their  disadvantage  is  least.  There 
is  really  no  difference  in  principle  between  international 
and  intranational  trade,  as  such.  In  any  case  there  is 
some  immobility  of  labor  and  capital.  In  any  case 
a  sufficient  inducement  will  at  least  partly  overcome 

1  See  Mill,  Principles  of  Political  Economy,  Book  III,  Ch.  XVII,  §  i. 
*  At  the  margin  of  production.  *  At  the  margin. 


INTERCOMMUNITY  TRADE  17 

the  immobility,  —  witness  the  flow  of  Italian,  Greek, 
and  Polish  labor  into  the  United  States.  So  the  differ- 
ence is  one  of  degree  and  not  one  of  kind.  Also,  such 
difference  as  exists  may  be  as  marked  between  widely 
separated  parts  of  the  same  nation  or  empire,  e.g. 
Maine  and  Montana,  or  Ireland  and  Canada,  as  between 
different  nations,  e.g.  Germany  and  Austria.  In  either 
case,  so  long  as  labor  and  capital  remain  where  they  are, 
specialization  is  worth  while. 

§5 

Summary 

In  this  chapter  we  have  discussed  trade  from  the 
standpoint  of  relations  of  prices  and  price  levels,  loca- 
tion of  industries,  and  the  gains  of  trade.  Through 
the  influence  of  trade,  the  price  in  any  country  of  any 
kind  of  goods  tends  towards  equality  with  the  price  in 
other  countries.  The  difference  will  not  much  exceed 
cost  of  carriage  plus  tariffs,  etc.  As  a  consequence, 
the  price  level  of  one  country  is  related,  if  they  have  a 
common  value  standard,  e.g.  gold,  to  the  price  level  of 
other  countries,  but  is  unlikely  to  be  the  same.  The 
prices  of  some  goods  are  lower  in  one  country  and  the 
prices  of  other  goods  are  lower  in  other  countries,  accord- 
ing to  what  each  country  can  produce  with  greatest 
relative  advantage. 

If  a  country  has  great  advantages  for  production  in 
any  line,  it  can  produce  in  that  line  with  great  profit 
and  can  pay  high  wages,  while  yet  selling  abroad  at  low 
prices,  the  goods  so  produced.  It  is  not  necessary  in 
order  that  a  country  shall  export  certain  goods  at  a  low 
price,  that  it  shall  be  able  to  produce  those  goods  with 
part  n  —  c 


18     ECONOMIC  ADVANTAGES  OF  COMMERCE 

less  effort  than  their  production  would  require  elsewhere, 
but  only  that  its  disadvantage  shall  be  less  in  that  line 
than  in  others.  On  the  other  hand,  if  one  country  has 
an  advantage  over  another  in  nearly  all  lines,  but  a  greater 
advantage  in  some  lines  than  others,  it  gains  most  by 
specializing  in  those  lines  where  its  advantage  is  greatest. 
Under  conditions  of  free  trade,  there  would  be,  then,  a 
large  amount  of  geographical  specialization,  each  country 
devoting  its  energies  to  those  lines  where  its  productive 
capacity  is  relatively  the  greatest.  Industry  is  turned 
the  more  from  the  lines  it  would  otherwise  follow  in 
each  country,  the  more  widely  and  intensively  restric- 
tion is  followed.  The  gains  from  trade,  when  each  of 
two  communities  has  an  absolute  advantage  over  the 
other,  and  when  each  has  a  relative  advantage  in 
some  line,  were  illustrated  by  hypothetical  figures. 

The  distinction  sometimes  made  between  international 
and  intranational  trade  was  referred  to,  viz.,  that  in 
the  latter  case,  greater  advantages  of  one  community 
in  all  lines  would  cause  movement  of  population,  while 
in  the  former,  immobility  of  labor  and  capital  is  more 
in  evidence.  In  the  former  case  (that  of  international 
trade),  therefore,  differences  in  relative  advantages  may 
sometimes  be  the  principal  basis  of  trade.  But  it  was 
pointed  out  that  this  distinction  is  but  a  distinction  in 
degree,  and  that,  in  any  case,  political  boundaries  are 
often  less  important  factors  in  immobility  of  labor  and 
capital  than  distance  and  natural  barriers. 


CHAPTER  II 

The  Rate  of  Interchange  of  Goods  between  Com- 
munities 

§i 

TJie  Limits  to  the  Rate  at  which  the  Goods  of  One  Country 
Exchange  for  Those  of  Another 

We  have  seen  that  differences  in  relative  productive- 
ness bring  about  trade  between  communities  if  there  are 
no  natural  or  artificial  barriers  or  if  these  barriers  are 
not  unduly  great ;  and  that  both  communities  concerned 
gain  by  such  trade.  How  much  each  community  gains 
depends  on  the  rate  at  which  the  goods  of  one  community 
exchange  for  those  of  the  other.  There  are  certain  limits 
between  which  this  rate  fluctuates,  and  at  a  rate  of 
exchange  of  goods  beyond  these  limits,  on  either  side, 
there  would  be  no  trade. 

In  showing  what  these  limits  are,  we  will  again  take 
trade  between  Ireland  and  Canada  for  illustration.  We 
assumed  that  a  week's  labor  in  Canada  would  produce 
20  bushels  of  wheat  or  14  yards  of  linen.  We  saw,  also, 
that  if  Canadians  could  get  $1  a  bushel  for  wheat,  they 
would  be  willing  to  produce  linen  for  $1.43  a  yard,  but 
not  for  less.  Since  Canadian  wheat  producers  could 
buy  this  cloth  at  home  for  $1.43  a  yard,  they  would  not 
pay  more  than  $1.43  a  yard  for  linen  cloth  brought 
from  Ireland.  At  a  price  greater  than  $1.43  per  yard, 
they  would  cease  to  buy.     If  wheat  is  $1  a  bushel,  then 

19 


20      ECONOMIC  ADVANTAGES  OF  COMMERCE 

a  price  of  $1.43  a  yard  for  linen  means  that  1.43  bushels 
of  wheat  must  be  sold  for  each  yard  of  linen  bought. 
This,  then,  is  one  of  the  limits  beyond  which  trade  will 
not  go.  If  Canadians  have  to  give  up  more  than  1.43 
bushels  of  wheat  to  get  a  yard  of  Irish  linen,  they  will 
lose  by  the  trade ;  if  less,  they  will  gain  by  it,  i.e.  will 
get  more  cloth  by  exchanging  a  week's  wheat  yield  for 
cloth  than  by  devoting  a  week  to  cloth  production. 
The  same  principle  applies  if  the  level  of  prices  in  Canada 
is  higher  or  lower.  Suppose  Canadian  wheat  could  be 
sold  for  $2  a  bushel.  Then  the  product  of  a  week's 
labor,  20  bushels,  would  yield  $40.  Obviously,  therefore, 
since  a  week's  labor  in  linen  production  would  yield, 
in  Canada,  but  14  yards,  a  price  of  $2.85  a  yard  would 
be  required  for  its  production  there.  In  this  case,  it 
would  pay  Canadians  to  devote  themselves  to  wheat 
production  and  sell  their  wheat  at  $2  a  bushel,  so  long 
as  they  could  buy  linen  abroad  at  less  than  $2.85  a  yard. 
At  this  price  or  a  greater,  they  would  no  longer  gain. 
But  we  have  merely  restated  our  limit  in  terms  of  a  new 
price  level.  At  $2.85  a  yard,  Canadians  would  be  parting 
with  1.43  bushels  of  wheat  for  each  yard  of  linen.  What- 
ever the  price  level,  therefore,  so  long  as  20  bushels 
requires,  in  Canada,  the  same  productive  effort  as  14 
yards,  the  limit  beyond  which  Canadians  would  refuse 
to  trade  is  1.43  bushels  per  yard.  At  any  less  price  of 
linen,  Canadians  would  gain,  and  the  lower  the  price, 
the  greater  the  gain  to  Canada.  The  principle  applies, 
also,  if  the  trading  countries  have  entirely  different 
monetary  standards.  If  Canada  had  an  inconvertible 
paper  money,  there  would  still  be  some  price  in  this 
money,  for  Irish  linen,  some  amount  of  this  money  neces- 
sary to  buy  the  foreign  exchange  or  the  gold  to  pay  for 


THE  RATE  OF  INTERCHANGE  OF  GOODS  21 

Irish  linen.  It  would  still  be  true  that  a  yard  of  linen 
produced  in  Canada  would  cost  1.43  times  as  much  as  a 
bushel  of  wheat.  If  the  amount  of  this  money  neces- 
sary to  buy  a  yard  of  linen  in  Ireland  should  be  more  than 
1.43  times  the  cost  of  a  bushel  of  Canadian  wheat,  the 
linen  would  not  be  imported. 

Beyond  one  limit,  Canada  would  gain  nothing  and 
would,  therefore,  refuse  to  trade.  Beyond  the  other 
limit,  Ireland  would  gain  nothing  and  would  refuse  to 
trade.  The  trade,  if  carried  on,  must  benefit  both,  and 
will  therefore  he  between  these  limits.1  Let  us  see  what 
is  the  limit  beyond  which  Ireland  would  not  trade.  If  a 
week's  labor  in  Ireland  will  produce  10  yards  of  linen 
or  6  bushels  of  wheat,  and  linen  sells  for  $1  a  yard,  then 
Irish  producers  would  be  willing  to  raise  wheat  for  $1.67 
a  bushel  but  not  for  less.  Since  the  Irish  linen  manu- 
facturing population  can  get  wheat  at  home  by  paying 
$1.67  a  bushel,  to  pay  more  for  Canadian  wheat  would 
involve  a  loss.  If  linen  is  $1  a  yard,  therefore,  Ireland 
will  profit  by  purchasing  Canadian  wheat,  at  any  price 
up  to  $1.67  a  bushel.  Beyond  that  price,  Ireland  will 
refuse  to  buy  from  Canada,  preferring  to  produce  the 
needed  wheat  at  home.  Similarly,  if  linen  made  in 
Ireland  should  sell  for  $0.50  a  yard,  Irish  linen  makers 
could  be  induced  to  produce  wheat  for  about  $0.83  a 
bushel,  and  that  would,  therefore,  be  approximately 
the  limit  to  what  Irish  linen  makers  would  pay  for 
Canadian  wheat.  In  other  words,  whatever  the  level 
of  prices,  the  most  that  Irish  linen  makers  would  pay 
for  a  bushel  of  Canadian  wheat  would  be  1.67  yards  of 

1  MM,  Principles  of  Political  Economy,  Book  in,  Ch.  XVIII,  §  2.  On  the 
general  theory  of  international  values  the  mathematical  reader  may  be  referred 
to  Edgeworth,  "The  Theory  of  International  Values,"  Economic  Journal,  Vol. 
IV,  1894,  pp.  35-50,  424-443,  606-638. 


22      ECONOMIC  ADVANTAGES  OF  COMMERCE 

linen.  At  any  less  price  they  would  gladly  buy.  At  a 
more  unfavorable  rate,  they  would  lose,  and  so  would 
refuse  to  trade.  We  have  found,  then,  the  two  limits 
to  exchange.  Between  1.43  bushels  for  1  yard  and  1.67 
yards  for  1  bushel,  the  rate  of  interchange  must  lie  if 
there  is  to  be  any  trade  at  all.  1.67  yards  for  1  bushel 
is  the  same  as  1  yard  for  .60  bushels.  Therefore,  the 
rate  of  trade  must  he  between  1.43  bushels  =  1  yard, 
and  .60  bushel  =  1  yard.  At  either  limit,  all  the  gain 
from  trade  would  go  to  one  or  the  other  of  the  two  trad- 
ing communities.  Between  these  limits,  the  gain  would 
be  divided  equally  or  unequally  between  those  commu- 
nities. 

§2 

Conditions  of  Supply  and  Demand  Determining  the  Exact 
Rate  of  Interchange  between  these  Limits 

The  question  which  has  now  to  be  answered  is,  what 
determines  the  exact  rate  of  interchange  —  and,  there- 
fore, the  gain  to  each  country  —  between  these  limits. 
We  shall  find  the  determining  factor  to  be  relative  in- 
tensity of  demand,  or,  to  use  more  familiar  terms,  we 
shall  find  the  rate  to  be  determined  by  supply  and  demand. 
Returning  to  our  illustration,  let  us  suppose  that  at  a 
price  of  $1  a  bushel  for  wheat  and  $1  a  yard  for  linen, 
Ireland  wants  more  bushels  of  wheat  from  Canada 
than  Canada  desires  yards  of  linen  from  Ireland.  In 
other  words,  Ireland's  intensity  of  demand  for  wheat  at 
these  prices  of  wheat  and  linen,  is  greater  than  Canada's 
intensity  of  demand  for  linen.  An  excess  of  money  would 
then  flow  into  Canada  and  prices  in  Canada  would  rise, 
while  in  Ireland  they  would  fall.1    This  would  continue 

1  Throughout  this  book  it  should  be  borne  in  mind  that  the  rise  and  fall  may 
be  only  relative.    There  may  be  a  general  rise  of  prices,  in  which  case  Canadian 


THE  RATE  OF  INTERCHANGE  OF  GOODS  23 

until  a  scale  of  prices  was  reached  at  which  trade  would 
be  in  equilibrium,  i.e.  at  which  Canada  would  buy  as 
many  dollars'  worth  of  linen  as  Ireland  would  buy  of 
wheat.1  Let  us  suppose  that  this  stage  is  reached  when 
the  quantity  of  money  in  Canada  is  \l  of  its  former 
amount,  and  in  Ireland  (having  smaller  population, 
wealth,  and  currency,  and  being,  therefore,  affected 
through  an  inflow  or  outflow,  by  a  greater  per  cent), 
f  of  its  former  amount.2  Then,  by  the  quantity  theory 
of  money,  prices  in  Canada  would  be  some  10  per  cent 
higher  than  previously.  Assuming  Canadian  prices 
all  to  rise  in  this  proportion,3  Canadian  wheat  would  sell 
for  $1.10  a  bushel.4  Canadians  would  now  be  unwill- 
ing to  make  linen  for  less  than  f£  of  this,  or  $1.57 
a  yard.     On  the  other  hand,  Irish  linen  would  sell  for 

prices  rise  in  greater  degree  than  those  of  Ireland.  Or  there  may  be  a  general 
fall  of  prices,  in  which  case  Irish  prices  fall  in  greater  degree  than  those  of  Canada. 
The  important  facts  for  our  argument  are  the  relation  of  Canadian  to  Irish  prices 
and  the  changes  in  this  relation.  The  discriminating  reader  will  easily  see  that 
none  of  our  essential  conclusions  are  affected  by  the  qualification  here  set  forth. 

1  See  Taussig,  Principles  of  Economics,  Vol.  I,  New  York  (Macmillan),  191 1, 
pp.  496,  497.  We  are  here  assuming  only  two  kinds  of  goods,  linen  and  wheat, 
to  enter  into  the  trade. 

2  If  the  difference  in  intensity  of  demand  is  slight  at  prices  of  $1  per  bushel 
and  $1  per  yard,  it  is  conceivable  that  equilibrium  may  be  reached  by  slight 
changes  in  the  rates  of  exchange,  insufficient  to  cause  a  flow  of  gold.  A  rate  of 
exchange  in  Ireland,  on  Canada,  slightly  above  par,  and  a  rate  in  Canada,  on 
Ireland,  slightly  below  par,  will  slightly  discourage  Irish  buying  from  Canada 
(or  Canadian  selling  to  Ireland)  and  slightly  encourage  Canadian  buying  from 
Ireland  (or  Irish  selling  to  Canada). 

3  Since  the  goods  imported  from  Ireland  would  not  rise  in  price,  but  would 
fall,  and  since  these  goods  must  be  handled,  in  Canada,  by  middlemen,  other 
prices  must  rise  by  more  than  Tl5  to  make  an  average  rise  of  that  proportion. 
But  if  exchanging  in  Canada  the  goods  brought  from  Ireland,  forms  but  a  small 
proportion  of  Canada's  total  internal  trade  (and  it  is  not  unreasonable  to  sup- 
pose this),  then  a  rise  in  all  other  prices  of  not  much  more  than  jfe,  would  make 
an  average  rise  of  fully  that. 

4  The  circumstances  which  might  prevent  wheat  from  changing  to  the  same 
extent  as  many  other  prices,  are  discusser  ;n  later  chapters.  For  the  present, 
these  circumstances  are  assumed  to  be  noiv  existent. 


24    ECONOMIC  ADVANTAGES  OF  COMMERCE 

|  of  its  former  price,  or  about  $0.88.  Irish  workers 
could  now  be  induced  to  produce  wheat  for  -V°-  of  this, 
or  about  $1.46.  This  is  cheaper  than  before  ($1.67), 
but  Ireland  would  still  gain  by  consuming  Canadian 
wheat,  while  Canada  would  gain  more  than  before  by 
purchasing  Irish  linen.  Canada  gets  more  for  her  wheat 
than  before  and  pays  less  for  her  cloth,  because  Ireland's 
demand  is  the  more  intense.  One  bushel  of  wheat  now 
gets  §{%,  and  $£  buys  a  yard  of  linen.  One  bushel 
of  wheat,  therefore,  now  buys  1.26  yards.  Ireland  gains 
less  than  before,  but  the  trade  is  still  inside  the  limit  of 
profitableness  to  Ireland.  Ireland  gives  1.26  yards  for 
one  bushel,  while  the  limit  of  profitableness  is  1.67  yards 
for  one  bushel.  At  the  new  rate  of  interchange,  Canada 
may  be  induced  to  buy  more  linen  and  Ireland 
prevented  from  buying  so  much  wheat.  Where  an 
equilibrium  is  found,  there  will  be  the  rate  of  trade.1 

Except  as  to  relations  of  money  prices,  the  conclu- 
sion is  the  same  if  the  two  countries  engaged  in  trade 
have  different  monetary  standards.  If  Canada,  for 
example,  had  paper  money  not  redeemable  in  gold, 
an  excess  demand  from  Ireland  for  Canadian  wheat 
could  not,  it  is  true,  increase  Canadian  money  or  Cana- 
dian prices ;  but  it  would,  as  we  saw  in  an  earlier  chap- 
ter,2 change  the  relative  values  of  Irish  and  Canadian 
money,  so  that  buyers  in  Ireland  of  Canadian  wheat 
must  spend  more  of  their  money  for  each  bushel  pur- 


1  Mill  suggests  that  there  may  be  several  rates  satisfying  the  conditions  of 
equilibrium,  Principles  of  Political  Economy,  Book  III,  Ch.  XVIII,  §  6.  This 
might  conceivably  be  the  case  if  the  trade  were  between  two  nations,  each  free 
of  competition  from  others,  and  if  few  articles  entered  into  the  trade.  In  the 
complications  of  actual  commercial  relations,  it  is  practically  impossible  that  it 
should  be  so. 

8  See  Part  I,  Ch.  VI,  §§  7,  8. 


THE  RATE  OF  INTERCHANGE  OF  GOODS 


25 


chased,  and  so  that  Canadians  could  buy  each  yard  of 
linen  at  a  cost,  in  Canadian  money,  less  than  before. 
At  some  rate  of  interchange  of  wheat  and  linen,  the  trade 
would  balance. 

The  rate  would  be  determinable,  also,  if  no  money 
were  used  and  trade  were  all  in  the  form  of  direct  barter. 
The  country  having  the  more  intense  demand  would, 
as  under  existing  forms  of  trade,  offer  a  better  rate.1 
We  may,  if  we  so  desire,  say  that  at  present  a  trade 
between  communities  is  resolvable  into  two  trades,  one 
of  goods  for  money,  and  a  second  of  money  for  other 
goods.  If  we  so  look  at  the  situation,  we  may  further 
say  that  each  of  the  two  trades,  separately,  illustrates 
the  effect  of  relative  intensity  of  demand.  The  country 
which  is  the  more  anxious  to  get  the  goods  of  the  other 
will  show  a  relatively  great  intensity  of  demand  for 
money  or  gold,  giving  a  comparatively  large  amount 
of  its  own  products  for  a  given  sum  of  money ;  and  it 
will  then  show  its  intensity  of  demand  for  the  desired 
products  of  the  other  country  by  giving  large  amounts 
of  money  or  gold  for  these. 

In  more  familiar  phraseology,  we  may  say  that  the 
rate  at  which  linen  exchanges  for  wheat  is  fixed  by  supply 
and  demand,  and  will  be  such  a  rate  that  the  supply  of 
wheat  offered  to  Ireland  by  Canada  is  equal  to  Ireland's 
demand  for  wheat;  otherwise  stated,  that  the  supply 
of  linen  offered  to  Canada  by  Ireland  shall  be  equal  to 
the  amount  demanded. 

1  The  general  principle,  in  fact,  even  when  actual  modern  trade  has  been  in 
view,  has  been  frequently  explained  by  economists  without  special  reference 
to  the  flow  of  money.  See,  for  example,  Mili,  Principles  of  Political  Economy, 
Book  III,  Ch.  XVIII,  §  2 ;  see  also  Bastable,  The  Theory  of  International  Trade, 
fourth  edition,  London  (Macmillan),  1903,  p.  27.  The  flow  of  money  has  then, 
as  in  Mill,  Ch.  XLX  of  Book  III,  and  Bastable,  Ch.  Ill,  been  brought  under  the 
general  law. 


26     ECONOMIC  ADVANTAGES  OF  COMMERCE 

§3 

Effect  on  this  Rate,  when  One  of  the  Countries  Ojjers  a 
Variety  of  Goods  in  Trade,  and  also  when  it  Receives 
Periodic  Payments  of  Obligations  from  the  Other 

We  must  now  modify  our  hypotheses,  to  make  them 
conform  more  nearly  to  actual  conditions.  In  trade 
between  two  countries,  there  are  almost  certain  to  be 
more  than  two  commodities  or  services  involved.  Ire- 
land, to  recur  to  our  illustration,  will  probably  buy  other 
things  than  wheat  of  Canada,  possibly  furs,  timber, 
iron  ore,  etc. ;  while  Canada  is  likely  to  buy  other 
things  than  linen  of  Ireland.  Then,  even  if,  at  $i  per 
bushel  and  $i  per  yard,  respectively,  Ireland  wants  more 
wheat  than  Canada  does  linen,  money  does  not  neces- 
sarily flow  to  Canada,  changing  relative  prices  and  the 
gains  of  trade.  For  Canada's  desire  to  purchase  other 
Irish  goods  may  be  intense  enough  to  keep  the  relative 
distribution  of  money  and  the  relative  benefits  of  trade 
as  they  were. 

In  general,  we  may  say  that  the  more  varieties  of 
goods  a  country  can  offer  for  export,  the  better  is  its 
position  in  trade.1  England's  position,  for  example, 
is  better  if  it  produces  several  kinds  of  goods  for  foreign 
sale  than  if  it  produces  but  one.  The  demand  of  France 
or  Italy  or  other  countries  for  these  several  kinds  of 
goods  will  be  greater  than  for  any  one  thing  alone.  As 
a  consequence,  there  will  be  a  greater  tendency  for  gold 
to  flow  into  England,  making  English  prices  higher  and 
French,  or  other  prices,  lower,  so  giving  England  a 
larger  gain  from  the  trade.  The  more  largely  English 
merchants   and   manufacturers   can   introduce   English 

1  Mill,  Principles  of  Political  Economy,  Book  III,  Ch.  XVIII,  §  6. 


THE  RATE  OF  INTERCHANGE  OF  GOODS  27 

goods  into  favor  in  the  Orient,  in  Africa,  in  South  America, 
or  elsewhere,  the  greater  is  the  gain,  not  to  these  mer- 
chants and  manufacturers  alone,  but  to  the  English 
nation.  Among  the  goods  that  England  is  in  a  position 
to  offer,  must,  of  course,  be  included  banking  service, 
freight  service,  etc.,  as  well  as  commodities.  The  fact 
that  other  countries  desire  to  make  use  of  her  ships  is 
as  much  a  help  toward  making  trade  more  profitable 
to  England  as  the  fact  that  other  nations  desire  to  buy 
her  manufactures. 

In  a  similar  way,  England  is  helped  by  the  fact  that 
her  people  have  large  investments  abroad,  on  which 
they  receive  interest,  dividends,  etc.1  According  to 
the  principles  set  forth  in  Part  I,  Chapter  V,2  this  means 
flow  of  gold  to  England,  higher  prices  there,  lower  prices 
where  the  money  comes  from,  and,  consequently,  a 
flow  of  money  back  again  from  England.  In  the  long 
run,  England  receives  interest  in  the  form  of  goods 
rather  than  of  money.  The  money  tends  to  flow  back 
until  the  normal  equilibrium  is  restored.  But  if  Eng- 
land has  relatively  permanent  investments,  say  in 
the  United  States,  and  is  therefore  receiving  interest 
and  dividend  payments  from  the  United  States  for 
many  years  in  succession,  the  normal  equilibrium  oi 
prices  probably  will  not,  during  all  that  time,  be 
reached.  As  fast  as  this  equilibrium  is  approached, 
further  interest  and  dividend  payments  upset  it. 
For  a  great  many  years,  therefore,  English  prices 
are  likely  to  be  somewhat  higher,  and  American 
prices  somewhat  lower,  than  would  be  the  case  if 
Americans  owed  nothing.  During  this  period,  then, 
England  will  get  somewhat   more   for    English   goods 

1  Taussig,  Principles  of  Political  Economy,  Vol.  I,  p.  499-  '  $  8. 


28     ECONOMIC  ADVANTAGES  OF  COMMERCE 

and  pay  somewhat  less  for  American  goods,  than 
otherwise.  The  rate  of  interchange  is  slightly  more 
favorable  to  England  than  it  would  otherwise  be. 
Even  assuming  all  trade  to  be  carried  on  in  the 
form  of  barter,  this  conclusion  would  still  hold  true. 
For  if  England  were  getting  continuous  interest  in 
American  goods,  English  desire  for  such  goods  would 
be  partly  satisfied,  their  utility  to  the  people  of  Eng- 
land would  be  less  (law  of  diminishing  utility),  and 
they  would  have  to  be  offered  at  a  less  value  in  terms 
of  English  goods.1 

On  the  other  hand,  England's  advantage  in  the  rate 
of  trade,  due  to  payments  of  interest,  etc.,  which  have 
to  be  made  to  Englishmen,  must  be  regarded  as  an  offset 
to  a  corresponding  disadvantage  in  the  rate  of  trade, 
during  the  period  when  the  investments  (on  which  in- 
terest, dividends,  etc.,  are  being  received)  were  made. 
During  the  period  when  England's  (or  any  country's) 
annual  investment  abroad  exceeded  her  annual  profits 
from  abroad,  the  tendency  was  for  gold  to  flow  from 
England  to  other  places.  This  tended  to  make  prices 
elsewhere  higher,  and  English  prices  lower,  to  give  other 
countries,  for  the  time  being,  a  more  favorable  rate  of 
interchange  of  goods  with  England.  A  country  whose 
people  are  making  large  investments  abroad,  then,  will 
have  to  dispose  of  its  goods,  for  the  time  being,  at  a  less 
favorable  rate;    but  it  will  later,  during  realization  of 

1  The  law  of  diminishing  utility  is  the  fundamental  explanation  of  England's 
gain  in  our  illustration,  even  if  money  is  used.  Were  it  not  for  the  law  of  dimin- 
ishing utility,  no  change,  or  no  appreciable  change,  in  relative  price  levels  would 
be  required  to  bring  about  the  flow  back,  for  goods,  of  the  money  paid  in  divi- 
dends, etc.  The  flow  back  would  begin  to  take  place  before  the  flow  of  money 
into  England  had  appreciably  changed  the  price  level  there  or  here,  and  would 
take  place,  therefore,  without  making  the  rate  of  interchange  of  goods  appre- 
ciably more  favorable  to  England. 


THE  RATE  OF  INTERCHANGE  OF  GOODS  29 

profits  and  repayment,  be  able  to  dispose  of  its  goods  at 
a  more  favorable  rate.1 

§4 

Influence  on  Trade  and  the  Rate  of  Trade  of  Production 
in  any  Country  under  Conditions  of  Diferent  Cost 

Up  to  this  point,  we  have  assumed  the  commodities 
entering  into  trade  to  be  produced  at  constant  cost  per 
unit,  regardless  of  the  amounts  produced.  But  such  is 
by  no  means  always  the  case.  Let  us  revert  to  the  in- 
stance of  Ireland  trading  with  Canada.  One  week's 
labor  in  Ireland  was  supposed  to  produce  6  bushels  of 
wheat.  As  a  matter  of  fact,  all  land  is  not  alike  in  fer- 
tility or  in  convenient  access  to  market.  While,  there- 
fore, it  might  be  true  that,  if  Ireland  produced  all  her 
own  wheat,  one  week's  labor  at  the  margin  of  cultiva- 
tion (that  is,  on  those  lands  least  favorable  to  wheat 
production  of  all  the  lands  so  used,  but  which  must  be 
devoted  to  wheat  production,  to  secure  an  adequate 
supply)  might  produce  but  6  bushels ;  a  week's  labor 
in  other  parts  of  Ireland  would  perhaps  produce  a  great 
deal  more.  If  Ireland  produced  all  her  own  wheat,  the 
people  of  Ireland  would  have  to  produce  it,  perhaps,  on 
unfertile  lands  and  where  the  conditions  of  production 
were  relatively  unfavorable.  It  might,  therefore,  be 
uneconomical  for   Ireland   to  produce  her  own  entire 

1  Since  investment  is  really,  in  large  part,  a  purchase  of  capital  goods,  e.g. 
railways,  farms,  factories,  etc.,  it  may  be  asked  why  the  general  discussion  re- 
garding the  trade  of  the  goods  of  one  country  for  the  goods  of  another  does  not 
cover  investment  also.  But  investment  is  rather  the  purchase  of  rights  in  goods 
which  are  not  themselves  moved.  The  capital  purchased  remains  in  the  foreign 
country  and  yields  future  income  to  the  distant  investors.  This  yielding  of 
future  income,  involves  a  later  and  opposite  influence  on  the  rate  of  trade  DC 
tween  the  countries,  which  does  not  occur  when  the  owners  and  the  capital  owned 
are  in  the  same  place.  Hence,  special  consideration  must  be  devoted  to  i  he 
effects  of  lending  and  investing,  on  trade. 


3o     ECONOMIC  ADVANTAGES  OF  COMMERCE 

supply  of  wheat.  Some  wheat  should  rather  be  imported 
from  Canada.  But  it  might  well  be  profitable  for  the 
people  of  Ireland  to  employ  some  of  their  more  fertile 
land,  if  not  better  situated  and  adapted  for  other  crops, 
in  wheat  production.1  The  possession  of  this  more 
fertile  land  would  lessen  the  intensity  of  Ireland's  demand 
for  Canadian  wheat,  and  would  thus  tend  to  make  the 
rate  of  trade  between  the  countries  more  favorable 
to  Ireland  than  if  her  entire  supply  of  wheat  had  to  be 
secured  from  abroad.  If  linen  sells  for  $i  a  yard  and 
Canadian  wheat  is  $i  a  bushel,  then  it  is  of  course  more 
profitable  for  Ireland  to  buy  Canadian  wheat  than  to 
produce  wheat  on  poor  Irish  land,  under  intensive  culti- 
vation (i.e.  with  but  small  areas  of  land  for  each  unit  of 
labor),  where  a  week's  labor  can  only  produce  6  bushels, 
and  where  it  can  only  be  remunerated  by  a  price  of  $1.67 
a  bushel.  But  it  would  be  profitable  for  Ireland  to  pro- 
duce wheat  for  home  consumption  on  land  where  a 
week's  labor  would  yield  14  or  13  or  down  to  10  bushels, 
unless  this  land,  or  part  of  it,  was  so  situated  and  adapted 
as  to  yield  still  more  from  some  other  use,  e.g.  from  being 
used  to  raise  potatoes.  A  yield  of  10  bushels  a  week 
would  require  only  $1  a  bushel  (linen  being  $1  a  yard), 
to  induce  wheat  production  in  Ireland,  and  so  to  raise 
the  wheat,  would,  by  our  hypothesis,  be  as  economical 
as  to  import  it  from  Canada.  On  land  yielding  7,  8,  9, 
or  less  than  10  bushels  a  week,  wheat  production  in  Ire- 
land is  uneconomical  as  long  as  a  yard  of  linen  cloth  will 
buy  from  Canada  a  bushel  of  wheat.  So  it  results  that, 
because  of  the  law  of  diminishing  returns,  it  is  often  most 
profitable  for  a  country  to  produce,  in  part,  its  desired 
supply  of  some  commodity,  and  import  the  rest.     If  the 

1  Bastable,  Theory  of  International  Trade,  pp.  29  and  30. 


THE  RATE  OF  INTERCHANGE  OF  GOODS  31 

demand  for  wheat  in  Ireland  became  greater,  poorer 
Irish  sources  of  production  would  perhaps  be  resorted 
to  for  a  small  part  of  the  supply,  while  somewhat  more 
would  be  imported  from  Canada  and  elsewhere  at  the 
higher  price,  relative  to  linen  cloth,  resulting  from  this 
greater  demand. 

By  similar  reasoning  it  may  be  shown  that  beyond  a 
certain  point  of  high  cost,  wheat  production  in  Canada 
for  export  would  not  be  carried,  but  that  the  people  of 
Canada  would  prefer  to  devote  themselves,  in  part,  to 
other  work,  even  to  the  manufacture  of  linen.  Cana- 
dians would  not  carry  wheat  production  to  land  so  poor 
(assuming  a  great  increase  in  population)  as  to  yield 
less  than  14  bushels  a  week,  so  long  as  14  yards  of  linen 
could  be  produced  in  a  week's  labor;  for,  beyond  that 
point,  it  would  pay  better  to  produce  linen  at  $1  a  yard 
than  wheat  at  $1  a  bushel.  Growing  density  of  popu- 
lation tends,  in  general,  to  the  spread  of  manufacturing, 
because  employment  in  agriculture,  after  a  certain  degree 
of  intensiveness  of  cultivation  has  been  reached,  becomes 
less  profitable  at  the  margin  the  more  persons  are 
engaged  in  it. 

It  has  been  the  good  fortune  of  the  American  people 
that  they  have  lived  in  a  country  not  overpopulated 
and  one  of  very  considerable  natural  resources.  They 
have  had  always,  therefore,  the  opportunity  to  engage 
in  the  extractive  industries,  particularly  in  agriculture, 
and  realize  large  returns  in  so  doing.  They  have  not 
had  to  take  up  manufacturing,  however  small  the  profits, 
merely  for  the  lack  of  a  profitable  alternative,  though 
they  have  found  it  worth  while  to  engage  in  various 
lines  of  manufacturing  industry  which  American  re- 
sources or  American  methods  make  especially  productive 


32     ECONOMIC  ADVANTAGES  OF  COMMERCE 

in  the  United  States.  If  other  countries,  such  as  Eng- 
land and  Germany,  are  forced  by  dense  populations 
and  limited  resources  to  engage  in  manufacturing  to  a 
greater  relative  degree,  Americans  have,  on  that  account, 
no  reason  for  envy,  nor  any  reason  for  attempting, 
through  tariffs  or  other  arbitrary  interferences,  to  force 
American  industry  more  largely  into  parallel  channels. 

§5 

Extension  of  Hypothesis  so  as  to  Include  Trade  Involving 
More  than  Two  Countries 

As  we  broadened  our  first  hypothetical  conditions 
so  as  to  include  more  than  two  kinds  of  goods,  we  shall 
now  further  broaden  them  so  as  to  consider  more  than 
two  trading  communities.  We  have  assumed  Ireland 
and  Canada  to  be  engaged  in  trade  with  each  other. 
But  trade  may  be  three-cornered  or  four-cornered  or 
more.  Ireland  may  sell  its  linen  chiefly  to  the  United 
States  instead  of  to  Canada  ;  the  United  States  may  sell 
cotton  to  Canada ;  and  Canada  may  in  turn  export  wheat 
to  Ireland.  Under  these  circumstances,  the  rates  of 
interchange  would  still  depend  on  relative  intensities 
of  demand.  The  rate  at  which  Ireland  can  exchange 
linen  for  wheat,  depends  on  the  price  which  can  be  re- 
alized, in  the  United  States,  for  linen,  and  the  price  which 
must  be  paid,  in  Canada,  for  wheat,  or  upon  the  intensity 
of  American  demand  for  the  linen  compared  to  the  in- 
tensity of  Irish  demand  for  the  wheat.  The  American 
demand  for  the  linen,  at  any  price,  will  depend,  in  part, 
on  what  Americans  can  get  for  cotton.  The  Canadian 
demand  for  cotton  will  depend,  in  part,  on  what  Cana- 
dians can  get  for  wheat.     If  Ireland  has  a  surplus  de- 


THE  RATE  OF  INTERCHANGE  OF  GOODS  33 

mand  for  wheat  at  $1  a  bushel,  gold  will  flow  to  Canada 
and  Canadian  prices  will  rise.  Canadians  may  then 
buy  more  cotton,  in  which  case  American  prices  will 
rise.  Irish  prices  will  fall,  and  Americans  will  probably 
buy  more  linen.  When  equilibrium  is  reached,  Ireland 
will  be  paying  somewhat  more  for  wheat  and  getting 
somewhat  less  for  linen.  The  United  States  will  prob- 
ably be  getting  somewhat  more  for  cotton  and  will  be 
paying  somewhat  less  for  linen.  Canada  or  the  United 
States  or  both  will  gain  more  from  the  trade,  and  Ire- 
land will  gain  less.  As  in  trade  between  two  countries, 
equilibrium  will  be  reached  at  a  set  of  relative  prices 
or  values  which  equalizes  supply  and  demand. 

How  are  the  commercial  interests  of  three  nations 
affected  by  the  entrance  of  the  third  into  trade  with 
the  other  two  ?  The  general  effect  will  be  an  increase 
of  prosperity,  and  it  is  entirely  possible  that  each  of  the 
three  countries  will  gain  something.  Suppose,  to  take 
a  seemingly  most  unfavorable  case,  that  France  enters  a 
trade  previously  confined  to  Ireland  and  Canada,  as  a 
competitor  of  Ireland,  competing  with  the  last-named 
country  in  the  sale  of  linen  to  Canada  and  in  the  purchase 
of  wheat  from  Canada.  In  so  far  as  France  engages 
in  this  trade  and  no  other,  Ireland  is  deprived  of  a  part 
of  her  former  gain ;  but  there  is  no  net  loss,  for  France 
and  Canada  together  gain  as  much  as  Ireland  loses,  or 
more.  In  consequence  of  the  competition  of  France, 
linen  will  fall  in  price,  or  wheat  will  rise,  or  both,  so  that 
a  yard  of  linen  buys  less  wheat  than  before.  So  far  as 
Ireland  still  engages  in  the  trade,  at  the  new  and,  to  her, 
more  unfavorable  rate  of  interchange,  Canada  gains, 
besides  her  former  profit,  precisely  what  Ireland  has 
ceased  to  gain.     So  far  as  Ireland  is  driven  out  of  the 


34     ECONOMIC  ADVANTAGES  OF  COMMERCE 

trade  by  the  entrance  of  France,  France  gains  at  least 
as  much  trade  as  Ireland  loses,  though  at  a  rate  of  in- 
terchange somewhat  more  profitable  to  Canada  and 
somewhat  less  so  to  France,  than  would  be  necessary 
were  Ireland's  competition  absent.  So  far  as  France  loses 
through  the  less  favorable  rate  of  interchange  caused 
by  Ireland's  competition,  Canada  gains.  If  the  result 
of  the  competition  is  a  larger  trade  for  Canada  with  the 
other  two  countries  than  Canada  previously  had  with 
the  one,  as  well  as  a  more  favorable  rate,  then  Canada 
gains  more  than  either  of  the  others  loses  or  than  both 
lose;  for  Canada's  greater  gain  on  the  same  trade  as 
before,  at  the  better  rate,  makes  up  for  the  lessened  gain 
of  the  other  or  others ;  while  the  additional  trade,  which 
must  be  at  least  worth  having  to  the  other  country  or 
countries,  else  it  or  they  would  not  trade,  is  a  very  consid- 
erable gain  to  Canada.  The  competing  countries,  there- 
fore, though  they  may  hurt  each  other,  will  benefit  by 
at  least  as  much,  and  probably  by  more,  the  country  or 
countries  for  whose  trade  they  compete. 

If,  now,  besides  competing  against  Ireland  in  the  trade 
with  Canada,  France  also  enters  into  trade  with  Ireland, 
both  Ireland  and  France  may  gain  from  this  trade  as 
much  as,  or  more  than,  they  are  losing  by  their  competi- 
tion. Then  the  entering  of  France  into  trade  relations 
with  the  other  two  countries  will  benefit  Canada,  Ire- 
land, and  France.  It  seems  a  perfectly  fair  statement, 
therefore,  that  the  more  widely  trade  is  voluntarily, 
and  without  governmental  encouragement,  extended,  i.e. 
the  more  countries  enter  into  it,  the  greater  is  the  total 
gain;  and  that  there  is  reasonable  hope  for  a  greater 
net  gain  to  all  countries  concerned.  In  no  case  can 
the  entrance  of  an  additional  country  or   community 


THE  RATE  OF  INTERCHANGE  OF  GOODS  35 

cause  a  country  or  community  already  engaged  in  a  trade, 
to  engage  thereafter  in  a  losing  trade.  It  has  already 
been  explained  that  unless  a  trade  yields  a  gain  to  both 
(as,  of  course,  to  all,  if  more  than  two)  countries  con- 
cerned, the  trade  will  not  take  place.  The  most  that 
the  new  competition  can  do  is  to  decrease  this  gain  for 
the  country  or  countries  on  one  side  of  the  trade.  And, 
as  above  pointed  out,  the  countries  which  lower  each 
other's  gains  by  competition  for  the  trade  of  a  third 
country,  may  increase  each  other's  gains  by  trade  with 
each  other. 

Any  country  gains  more,  the  more  numerous  the  other 
countries  which  desire  its  products  and  the  more  nu- 
merous the  other  countries  which  have  goods  to  offer  it. 
On  the  other  hand,  the  competitive  entering  of  many 
countries  into  trade  makes  it  impossible  for  any  one 
country  to  gain  so  extreme  a  share  of  the  advantage  in 
trade  with  another  as  otherwise  it  might.  The  one 
country  will  seldom  have  a  monopoly  of  the  production 
of  goods  needed  in  the  other  and  will  seldom  be  the  only 
place  where  the  other  can  sell  its  products.  Alternative 
markets  will  generally  be  available,  and  the  gains  of 
trade  are  therefore  likely  to  be  more  nearly  equal  between 
two  trading  countries.  It  is  for  these  reasons  that  the 
policy  of  European  nations,  in  early  colonial  days,  of 
restricting  the  trade  of  colonies  with  other  than  their 
respective  mother  countries,  might  be  advantageous 
to  the  mother  countries,  but  was  at  the  same  time  dis- 
advantageous to  the  colonies. 


36      ECONOMIC  ADVANTAGES  OF  COMMERCE 

§6 

Cost  of  Transportation  as  Related  to  Trade 

Cost  of  transportation  is  a  factor  influencing  trade, 
which  must  be  considered  before  our  discussion  is  com- 
plete. This  cost  subtracts  from  the  gains  of  trade  the 
amount  necessary  to  remunerate  those  engaged  in  carry- 
ing the  goods.  The  principles  determining  how  much 
gain  is  realized  by  each  country  are,  of  course,  unaffected. 
Trade  which  cannot  yield  enough  to  pay  for  transporta- 
tion simply  does  not  take  place,  unless  it  is  artificially 
stimulated,  as  by  government  bounties. 

§7 

Summary 

In  this  chapter  we  have  confined  our  attention  almost 
entirely  to  the  rate  of  interchange  of  goods  between 
trading  communities  and  countries.  We  have  seen  that, 
in  the  case  of  trade  between  any  two  countries,  the  rate 
at  which  the  goods  of  the  one  exchange  for  the  goods  of 
the  other  cannot  lie  beyond  either  of  two  limits,  at  the 
one  of  which  the  one  country,  and  at  the  other  of  which 
the  other  country,  gains  nothing  from  the  trade.  ;_  Be- 
tween these  limits,  the  exact  rate  is  fixed  by  the  com- 
parative intensity  of  demand  of  each  country  for  the 
goods  of  the  other,  or,  to  use  familiar  terms,  by  supply 
and  demand.  Whether  gold  is  a  common  standard  of 
value,  or  the  currencies  unrelated,  or  the  trade  direct 
barter  of  goods  for  goods,  the  rate  of  interchange  will 
be  fixed  where  intensities  of  demand  balance. 

A  country  is  the  more  likely  to  get  a  large  share  of 
the  total  gain  resulting  from  its  trade  with  another 


THE  RATE  OF  INTERCHANGE  OF  GOODS  37 

country  or  countries,  the  greater  the  variety  of  goods 
it  can  offer  to  stimulate  the  desire  of  the  other  country 
or  countries  to  trade*.  In  like  manner,  a  country  to 
which  payments  have  to  be  made  by  other  countries, 
e.g.  of  interest  and  dividends,  is  in  a  position  to  get,  in 
consequence,  more  favorable  rates  of  interchange,  though 
such  a  country  may  have  had,  previously,  during  the 
period  of  its  investing  operations,  somewhat  less  favor- 
able rates. 

The  assumption  first  made  that  each  country  would 
buy  of  the  other  the  goods  securable  most  cheaply  from 
the  other,  was  explained  and  qualified  to  conform  with 
the  fact  of  differing  cost  of  production  of  any  good,  within 
the  same  country.  It  was  pointed  out  that  a  country 
might  produce  for  itself  a  certain  amount  of  a  desired 
kind  of  goods,  from  its  most  favorable  sources  of  supply, 
or  up  to  the  point  where  further  home  production  would 
involve  uneconomical  employment  of  its  labor  and  capi- 
tal ;  and  that  beyond  that  point  it  would  import. 

Our  assumptions  were  further  broadened  to  include 
trade  involving  more  than  two  countries.  Three-cor- 
nered trade  was  alluded  to,  and  it  was  shown  that  the 
influence  of  comparative  intensity  of  demand  is  of  deter- 
mining force  in  this  case  and  likewise  in  cases  involving 
still  more  countries.  If  a  third  country  (or  a  fourth 
or  fifth)  enters  into  a  trade  previously  confined  to  two 
countries  (or  three  or  four),  the  result  will  be  a  greater 
total  prosperity,  although  if  the  third  country  enters 
the  trade  only  as  a  competitor  of  one  of  the  others,  that 
one  may  find  its  gains  somewhat  reduced.  If  each  trades 
with  each  of  the  others,  there  is  a  reasonable  prospect 
for  increased  prosperity  to  all  three.  Any  country, 
however,  is  prevented  by  the  entrance  of  other  countries 


38      ECONOMIC  ADVANTAGES  OF  COMMERCE 

into  competition  with  it  from  realizing  exorbitant 
profits  at  the  expense  of  the  countries  it  trades  with. 
On  the  other  hand,  any  country  gains  the  more  from 
trade,  the  larger  the  number  of  other  countries  which 
compete  with  each  other  in  buying  from  and  selling  to  it. 


CHAPTER  III 
The  Incidence  of  Tariffs  for  Revenue 

§i 

Revenue  and  Protective  Tariffs  Distinguished 

So  far  we  have  discussed  international  trade  mainly 
on  the  assumption  that  such  trade  is  wholly  free.  As  a 
matter  of  fact,  trade  is  almost  never  wholly  free  between 
nations,  though  it  is  frequently  so  within  the  boundaries 
of  a  single  nation.  One  of  the  largest,  if  not  the  largest, 
of  free  trade  areas  in  the  world,  is  the  United  States. 
Between  one  state  and  another,  any  tariff  is  unconsti- 
tutional. We  have,  therefore,  free  trade  within  our 
own  borders,  though  not  with  outside  nations.  Almost, 
if  not  quite,  every  nation  has  a  tariff  wall,  high  or  low 
as  the  case  may  be,  which,  usually,  to  a  greater  or  less 
extent,  hampers  trade.  Tariff  duties  at  the  boundaries 
of  a  country  may  be  levied  on  goods  imported  or  on  goods 
exported,  but  in  practice  are  much  more  likely  to  be 
levied  on  the  former.  We  shall  consider  the  economic 
effects  of  both  import  and  export  duties. 

Import  duties  are  of  two  sorts,  revenue  tariffs  and 
protective  tariffs.  A  strict  revenue  tariff  is  intended 
to  raise  revenue,  while  not  interfering  with  trade  more 
than  is  necessary.  Although  absolute  free  trade  practi- 
cally never  exists  between  great  nations,  yet,  in  ordinary 
usance,  free  trade  is  said  to  exist  when  the  tariff  levied 
is  levied  according  to  strict  revenue  principles.  A 
strictly  revenue  tariff,  or  so-called  "free  trade,"  means, 

39 


4o      ECONOMIC  ADVANTAGES  OF  COMMERCE 

then,  such  an  adjustment  of  taxes  as  will  not,  in  any 
great  degree,  divert  industry  in  the  levying  country  out 
of  the  channels  it  would  otherwise  follow,  i.e.  it  will 
so  divert  industry  to  the  least  possible  extent  consistent 
with  collection  of  the  needed  revenue.  A  tariff  levied 
by  any  country  only  on  goods  not  produced  within  it, 
is  such  a  tariff.  An  example  is  the  British  import  tax 
on  tea,  an  article  not  produced  in  Great  Britain  or  Ire- 
land. An  import  duty  on  goods  which  are,  or  can  be, 
produced  within  the  levying  country,  is  also,  properly 
speaking,  a  revenue  duty,  if  it  is  accompanied  by  an 
internal  tax  of  equal  amount 1  on  the  domestic  product. 
Such  a  tax  does  not  have,  and  is  not  intended  to  have, 
any  great  effect  on  the  location  of  industry.  If  the 
domestic  producer  is  helped  by  the  tax  levied  on  imported 
goods,  he  is  hindered  to  an  approximately  equal  extent 
by  the  tax  laid  upon  his  own  goods.2  His  position  in 
relation  to  that  of  his  foreign  rivals  remains,  therefore, 
substantially  the  same  as  before. 

A  protective  tax  is  intended,  as  such,  primarily  to 
divert  industry  from  the  channels  it  would  otherwise 
follow  into  channels  favored  and  encouraged  by  the 
tariff  law.  Its  purpose  is  to  encourage  the  home  pro- 
ducer in  some  line  or  lines  by  levying  a  high  tax  on 
goods  brought  from  abroad  and  thus  discouraging  the 
importation  of  such  goods. 

1  If  the  domestic  goods  are  of  identical  grade  and  therefore  of  the  same  value, 
a  tax  of  the  same  per  cent  is  also  a  tax  of  the  same  amount  per  unit  of  quantity. 
If  the  domestic  goods  are  of  different  grade  and  different  value,  the  question 
might  arise  whether  a  per  cent  tax  or  a  tax  per  unit  should  be  levied  equally  on 
both. 

2  Of  course  the  tax,  by  necessitating  a  higher  price,  may  decrease  the  total 
demand.  If  so,  both  home  and  foreign  producers  may  make  smaller  sales.  But 
so  far  as  the  public  still  buys  the  goods,  these  goods  are  produced  where  the  condi- 
tions are  relatively  the  best. 


THE  INCIDENCE  OF  TARIFFS  FOR  REVENUE    41 

Expressing  the  matter  in  another  way,  we  may  say 
that  both  the  revenue  and  the  protective  tariff  are  taxes 
on  the  consumer ;  but  that  in  the  former  case  the  con- 
sumer pays  this  tax  to  the  government,  while  in  the 
latter  he  pays  a  tax  to  the  home  producer.  A  revenue 
tariff  on  imports  can  only  be  successful  in  its  chief  aim 
if  it  allows  goods  to  be  imported,  because  on  all  such 
goods  a  tax  is  paid  which  goes  to  the  government  and 
may  be  used  for  public  purposes;  while,  on  the  other 
hand,  a  protective  tariff  is  most  successful  in  its  aim 
in  so  far  as  it  prevents  goods  from  being  imported,  be- 
cause then  its  effect  is  to  raise  the  price  which  the  home 
producers  can  charge.  In  this  latter  case,  the  govern- 
ment gets  little  or  no  revenue,  and  the  tax,  if  we  call 
it  such,  which  the  consumer  pays,  is  paid,  in  the  main, 
to  the  home  producers,  rather  than  to  the  government. 
In  other  words,  the  protective  tariff  makes  the  consumer 
buy  of  the  home  producer  at  prices  higher  than  the  home 
producer  could  otherwise  charge. 

§2 

When  the  Burden  of  an  Import  Duty  Levied  for  Revenue 
is  Borne  by  the  Levying  Country 

A  revenue  import  duty  is  commonly  supposed  to  be 
shifted  by  the  importers  on  whom  it  is  first  imposed,  to 
the  consumers,  in  the  levying  country,  of  the  taxed  goods. 
In  the  complications  of  modern  trade,  with  many  coun- 
tries taking  part,  this  result  is  perhaps  very  nearly 
realized.  But  it  is  perhaps  never  exactly  realized,  and 
it  is  not  difficult  to  imagine  circumstances  under  which 
the  main  burden  of  the  tax  would  fall  elsewhere  than 
on  the  consuming  public  of  the  tariff  levying  country. 


42      ECONOMIC  ADVANTAGES  OF  COMMERCE 

Under  sufficiently  favorable  (to  the  levying  country) 
circumstances,  a  part,  or  all,  of  the  tax  might  fall  upon 
the  exporting  country,  or,  conceivably,  the  exporting 
country  might  lose  more  than  the  tax,  to  the  profit  of 
the  levying  country. 

Let  us,  in  discussing  the  various  possible  shiftings  of 
an  import  revenue  duty,  use  again  our  familiar  illus- 
tration, the  assumed  trade  between  Ireland  and  Canada. 
If  Canada,  where  a  week's  labor  will  produce,  according 
to  our  first  assumptions,  20  bushels  of  wheat  at  $1  a 
bushel  or  14  yards  of  linen  at  $1.43  a  yard,  levies  an 
import  duty  of  10  cents  a  yard  on  linen  from  Ireland, 
which  would  otherwise  sell  for  $1  a  yard,  this  linen  will 
sell  for  $1.10.  Irish  linen  will  still  be  bought  by  Cana- 
dians in  preference,1  since  Canadian  linen  cannot  be 
sold  for  less  than  $1.43.  The  tax  is  levied  first  on  the 
importers.  The  importers  will  not,  perhaps  cannot, 
remain  in  business  if  they  are  unable  to  shift  the  tax, 
for  to  pay  it  themselves  will  make  their  profits  (if  these 
have  been  subject  to  competition  and  are  therefore 
approximately  the  same  as  in  other  kinds  of  business) 
less  than  the  same  labor  and  capital  will  yield  in  other 
lines,  and  will  very  likely  even  turn  them  into  losses. 
The  foreign  producers  will  not  (unless  combined  in  a 
monopoly  and  previously  earning  monopoly  profits, 
and  not  then  except  under  very  improbable  circum- 
stances 2)  consent  to  suffer  the  loss,  since  this  will  reduce 

1  If  there  is  any  likelihood  that  such  will  not  be  the  case,  and  if  the  tariff  is 
to  be  levied  for  revenue,  not  for  protection,  a  tax  as  great  should  be  placed  on 
the  home  produced  goods. 

2  I.e.  if  the  monopoly  will  lose  less  to  bear  the  whole  tax  than  to  shift  it  and  suf- 
fer a  reduction  of  its  sales.  A  monopoly  will  itself  pay,  without  trying  to  shift, 
a  tax  levied  directly  on  monopoly  profits,  since  the  monopoly  can  best  pay  such  a 
tax  by  maintaining  the  same  prices,  i.e.  prices  yielding  the  highest  net  return. 
But  a  tax  which  increases  in  proportion  to  the  number  of  sales,  a  monopoly  will 


THE  INCIDENCE  OF  TARIFFS  FOR  REVENUE    43 

their  profits  below  the  average  level  in  their  country, 
in  other  lines.  The  supply  of  Irish  linen  offered  in 
Canada  will  not,  therefore,  equal  the  demand,  unless 
the  price  rises  by  10  cents  a  yard. 

If  the  demand  of  Canada  for  linen  is  absolutely  in- 
elastic, the  shifting  proceeds  no  further;  the  10  cents 
a  yard  remains  as  a  continuing  burden  on  Canadian 
consumers  of  linen.  A  certain  amount  of  linen  was 
wanted  at  the  former  and  lower  price,  and  the  same 
amount  is  wanted  at  the  somewhat  higher  price.  The 
10  cents  additional  goes  to  the  Canadian  government. 
The  same  amount  as  before  must  be  paid  to  linen  manu- 
facturers in  Ireland.  Canadian  wheat  prices  will  not 
change,  and  wheat  consumers  in  Ireland  will  buy  the 
same  amount  as  before  of  Canadian  wheat.  The  trade 
will  be  in  equilibrium  at  just  the  same  point,  as  to  quan- 
tity of  money  in  each  country  and  as  to  amount  of  cloth 
required  to  buy  a  bushel  of  wheat,  as  before.  The  net 
result  is  to  take  10  cents  a  yard  from  each  Canadian 
purchaser  of  linen  imported  from  Ireland,  and  transfer 
this  10  cents  to  his  government.  If  we  omit  reference 
to  money  and  money  prices,  we  may  say  that  the  tax 
has  left  just  where  it  was  before,  the  rate  of  interchange 
between  the  two  commodities,  linen  and  wheat,  which 
equalized  supply  of  and  demand  for  each  in  terms  of 
the  other ;  and  that  the  Canadian  government  has  sim- 
ply taken  in  taxation,  from  its  own  subjects,  a  part  of 
their  gain  from  the  trade. 

be  more  likely  to  endeavor  to  shift,  and  will  not  so  greatly  fear  a  resulting  de- 
crease of  its  sales,  since  this  involves  a  decreased  tax  also. 


44     ECONOMIC  ADVANTAGES  OF  COMMERCE 

§3 

When  the  Burden  of  an  Import  Duty  Levied  for  Revenue 
is  Shifted  by  the  Levying  Country  to  Another  or  to 
Other  Countries 

But  the  situation  is  otherwise  if  Canada's  demand 
for  Irish  linen  is  elastic  while,  at  the  same  time,  Ireland's 
demand  for  Canadian  wheat  is  inelastic.  If  the  demand 
of  Canada  for  linen  imported  from  Ireland  is  elastic, 
then  the  effect  of  the  ten  cents  tax,  in  raising  the  price 
of  the  linen  to  $1.10  a  yard,  will  be  to  decrease  the  Cana- 
dian demand  for  the  linen.  In  consequence,  Canada 
will  have  a  smaller  money  obligation  to  Ireland.  Yet  if 
Ireland  continues  to  buy  as  much  wheat  as  before,  the 
yearly  money  obligations  from  Ireland  to  Canada  will 
be  the  same  as  if  the  tax  were  not  in  force.  There  will 
consequently  be  an  excess  flow  of  money  to  Canada. 
Canadian  prices  will  rise  and  Irish  prices  will  fall.  Of 
course,  if  the  Irish  demand  for  wheat  is  elastic,  or  if 
Ireland  can  as  cheaply  buy  her  wheat  elsewhere,  Ire- 
land's demand  for  wheat  will  fall  off  as  soon  as  the  price 
rises  very  slightly.  Then  there  can  be  little  redistribu- 
tion of  the  money  metal,  and  Canada  can  shift  very 
little  of  the  tax  upon  Ireland.  The  net  result  is  less 
trade.  Canadians  buy  less  cloth  and  sell  less  wheat. 
But  if  the  Irish  demand  for  Canadian  wheat  is  inelastic, 
continuing  at  about  the  same  amount  despite  rise  of 
prices,  then  the  tax  may  seriously  decrease  Ireland's 
gain  from  the  trade,  to  Canada's  advantage. 

To  illustrate  this  possibility,  let  us  suppose  that,  in 
consequence  of  the  tax  on  linen  of  ten  cents  a  yard, 
which  raises  the  price  to  Canadian  consumers,  the  de- 
mand for  linen  is  so  decreased  in  Canada  that  there  is 


THE  INCIDENCE  OF  TARIFFS  FOR  REVENUE    45 

a  net  inflow  of  gold  from  Ireland;  and  let  us  suppose, 
further,  that  the  inflow  of  gold  does  not  cease  until  the 
supply  of  money  in  Canada  is  \{  of  its  former  amount, 
and  that  of  Ireland  -^  of  what  it  was.  Then  Cana- 
dian wheat  would  sell  for  \\  of  $1  or  about  $1.09 
a  bushel,  while  Irish  linen,  not  counting  the  tax,  would 
sell  for  $0.90  instead  of  $1  per  yard,  or,  with  the  ten 
cents  tax,  at  $1  instead  of  $1.10.  Let  us  suppose  that, 
at  this  new  set  of  prices,  Canada  again  has  to  pay  Ire- 
land as  much  for  linen  each  year  as  Ireland  has  to  pay 
Canada  for  wheat. 

How  does  the  case  stand  as  to  gains  and  losses  of 
the  two  communities  ?  The  Canadians  are  still  getting 
their  linen  for  $1  a  yard,  the  price  without  the  tax  hav- 
ing fallen  to  $0.90.  And  they  are  getting  $1.10  a  bushel 
for  wheat  instead  of  $1.  The  Canadian  government 
is  securing  its  ten  cents  tax  on  every  yard  of  linen ;  yet 
Canadian  consumers  are  paying  no  more  than  before 
the  tax  was  laid,  and  Canadian  producers  are  getting 
a  higher  price  for  their  wheat.  The  people  of  Ireland 
are  paying  to  Canada  the  tax  and  more  than  the  tax.1 
The  linen  manufacturing  interests  of  Ireland  are  receiv- 
ing $0.90  instead  of  $1  a  yard  for  their  linen;  they 
are  paying  more  for  wheat.  It  is  still  worth  while  for 
them  to  engage  in  the  trade.  They  can  still  secure  more 
wheat  in  exchange  for  a  week's  production  of  linen  than 
they  can  themselves  produce  in  a  week  (except  on  their 
best  lands).  But  they  gain  much  less  from  the  trade 
than  formerly.  It  should  be  added  that  the  taxing 
country,  Canada,  may  gain  also  in  lower  prices  of  other 
Irish  goods  than  linen  cloth,  resulting  from  the  redis- 
tribution of  money,  and  in  their  ability  to  buy  more  of 

1  Mill,  Principles  of  Political  Economy,  Book  V,  Ch.  IV,  §  6. 


46     ECONOMIC  ADVANTAGES  OF  COMMERCE 

these  goods  because  of  the  lower  prices  and  their  own 
higher  incomes. 

We  must  guard  ourselves  against  the  assumption  that 
the  whole  loss  falls  upon  the  Irish  linen  manufacturing 
population  as  distinguished  from  Irish  producers  in 
other  lines.1  The  loss  is  general.  The  linen  producers 
would  not  remain  in  that  business  and  alone  bear  all 
the  loss,  since  labor  and  capital  tend  always  to  leave 
relatively  unprofitable  for  relatively  profitable  activities. 
They  only  sell  linen  more  cheaply  because  of  a  decrease 
of  money  in  Ireland,  which  tends  to  lower  in  a  like  pro- 
portion the  prices  of  all  Irish  goods  and  Irish  labor.2 
Likewise,  the  higher  price  of  Canadian  wheat  falls  alike 
on  all  consumers  of  it  in  Ireland. 

On  one  hypothesis,  however,  the  price  of  linen  made 
in  Ireland  would  fall  by  a  greater  per  cent  than  other 
Irish  prices,  viz.  on  the  hypothesis  (likely  to  be  in  con- 
formity with  fact)  that  the  profits  of  linen  production 
are  greater  in  some  factories  and  on  some  sites  in  Ire- 
land than  on  other  sites  in  that  country.  If  the  tax 
decreases  the  demand  for  the  linen  in  Canada,  the  Irish 
manufacturers  on  the  better  sites  may  alone  be  able 
to  satisfy  the  demand  remaining ;  and  they  may  be 
willing  to  do  so,  because  of  their  relatively  advanta- 

1  Mill,  Principles  of  Political  Economy,  Book  V,  Ch.  IV,  §  6. 

2  Strictly  speaking,  a  rs  decrease  of  money  in  Ireland  would,  under  the  con- 
ditions here  assumed,  cause  a  fall  in  the  prices  of  Irish  goods,  of  more  than  ^. 
For  it  would  cause  a  fall  of  A  in  average  prices,  including  the  price  of  Canadian 
wheat  and  its  products  so  far  as  bought  and  sold  in  Ireland,  e.g.  by  middlemen. 
Since  these  goods  would  be  higher  in  price,  other  goods  must  fall  in  greater  pro- 
portion than  io  per  cent.  Whether  the  fall  in  the  prices  of  other  goods  would 
be  much  greater  than  io  per  cent,  would  depend  upon  the  importance,  in  the 
Irish  market,  of  the  Canadian  product.  If  trade  with  Canada  is  assumed  to 
be  of  slight  importance,  other  prices  would  fall  by  about  A,  otherwise  by  more. 
But  no  good  purpose  would  be  served  by  complicating  the  text  with  these  re- 
finements. 


THE  INCIDENCE  OF  TARIFFS  FOR  REVENUE    47 

geous  positions,  at  prices  lower  than  could  be  afforded 
by  marginal  manufacturers  (e.g.  those  on  the  poorest 
sites),  rather  than  go  into  other  occupations.  The  loss 
to  Ireland,  due  to  Canada's  tax,  would  then  fall  with 
greatest  weight  on  the  linen  producers  of  Ireland,  or 
on  the  owners  of  sites  adapted  to  linen  manufacture. 
A  surplus  gain,  from  better  organization  or  from  more 
advantageous  situation,  which  these  classes  had  pre- 
viously enjoyed,  would  be  lessened. 

As  regards  the  ultimate  burden  of  the  tax,  we  reach 
no  different  conclusion  if  we  assume  the  currencies  of 
Ireland  and  Canada  to  be  based  on  independent  standards 
and  prices  in  the  one  country  to  be  entirely  unrelated 
to  prices  in  the  other.1  Suppose  each  to  have  a  paper 
money  standard,  not  redeemable  in  gold.  The  ten 
cents  tax  discourages  Canadian  purchase  of  Irish  linen. 
Ireland  continues  to  buy  about  the  usual  amount  of 
Canadian  wheat.  The  balance  is  settled  in  gold.  In 
Ireland,  gold  becomes  scarcer  and  has  more  purchasing 
power;  in  Canada,  it  becomes  more  plentiful  and  has 
less  purchasing  power,  per  unit  quantity.  Irish  paper 
money  will  buy  less  gold.  Canadian  paper  money  will 
buy  more  gold.  Canadian  wheat  remains  $1  a  bushel 
in  terms  of  Canadian  money,  but  it  requires  more  gold 
than  before  to  buy  it,  and  more  Irish  money  to  buy  the 
gold.  The  cost  to  the  people  of  Ireland  of  Canadian 
goods  tends  to  rise.  The  cost  to  Canadians  of  the 
products  of  Ireland  tends  to  fall.  Omitting,  altogether, 
consideration  of  money  prices,  we  may  say  that  the 
tax,  by  discouraging  Canadians  from  trading,  has  made 
necessary  a  new,  and,  for  Canada,  a  more  favorable 
rate  of  interchange  of  goods,  to  equalize  supply  and 
demand. 

1  Cf.  Part  I,  Ch.  VI,  §§  6,  7.  8,  9. 


48      ECONOMIC  ADVANTAGES  OF  COMMERCE 

The  illustrative  figures  which  have  been  given  show 
a  loss  to  Ireland  greater  than  the  amount  of  Canada's 
tax.1    Ireland's  loss,  however,  might  be  the  equivalent 

1  Professor  Edgeworth  seems  to  take  the  view  (Economic  Journal,  Vol.  VII, 
p.  397)  that  this  extreme  possibility  is  a  consequence  of  the  tax  being  collected, 
in  practice,  in  money,  and  that  if  it  were  collected  in  kind,  Ireland  (in  our  ex- 
ample) could  not  be  made  to  pay  more  than  the  tax.  His  thought  apparently 
is  that,  however  elastic  Canada's  demand  for  linen,  if  Ireland  paid  the  tax  in 
linen,  in  addition  to  giving  Canadian  consumers  as  much  linen  as  before  for  the 
same  amount  of  wheat  as  before,  the  trade  would  again  be  in  equilibrium ;  that 
the  Canadian  consumers,  as  distinguished  from  the  government,  would  then  be 
entirely  unaffected  by  the  tax,  and  would  be  as  willing  to  buy  linen  with  wheat 
as  previously  and  in  as  large  quantities ;  and  that  Ireland,  therefore,  would  not 
have  to  pay  more  than  the  tax  to  get  the  accustomed  supply  of  wheat  from 
Canada. 

A  correct  distinction  between  the  circumstances  under  which  more  than  the 
burden  of  the  tax  might  conceivably  be  shifted  upon  Ireland  and  the  circum- 
stances under  which  the  full  amount  of  the  tax  would  be  the  limit  of  this  burden, 
is  based  on  what  the  Canadian  government  does  with  the  tax  and  not  at  all  on 
whether  it  is  initially  collected  in  money  or  in  kind.  We  may  rightly  conclude 
that  a  Canadian  import  tax  collected  in  linen  could  not  impose  a  greater  burden 
upon  Ireland  than  the  amount  of  the  tax,  if  we  suppose  the  Canadian  govern- 
ment to  throw  the  linen  it  receives  as  taxes  into  the  sea  or  if  we  assume  that  it 
uses  the  linen  so  received  for  a  purpose  which  would  otherwise  not  be  carried 
out.  We  may  reach  exactly  the  same  conclusion  with  equal  certainty,  however, 
if  we  suppose  the  tax  to  be  initially  collected  in  money  and  the  money  then  used 
to  buy  the  linen  to  be  disposed  of  in  one  of  these  two  ways.  If  the  burden  of  this 
tax  collected  in  money  falls  entirely  upon  Ireland,  then  Ireland  must  sell  enough 
more  linen  (assuming  she  has  no  other  exports)  to  pay  it.  But  the  Canadian 
government  expends  the  entire  money  returns  from  the  tax  for  linen  which, 
otherwise,  by  our  present  hypothesis,  the  government  would  not  buy.  In 
other  words,  Canada  buys  as  much  more  linen  as  Ireland  must  sell  additional 
to  pay  the  tax.  If  Ireland,  therefore,  thus  bears  the  entire  burden  of  the 
tax  by  exporting  extra  linen,  the  remainder  of  her  linen  will  find  the  same 
market  as  previously  and  will  bring  her  as  much  wheat  as  before. 

But  if  the  Canadian  government  would  use  about  the  same  amount  of  linen 
anyway,  then  for  the  government  to  get  this  linen  by  taxing  linen  imports  in 
kind  (and  likewise  by  taxing  them  in  money)  instead  of  by  purchasing  the  de- 
sired linen  with  the  proceeds  of  internal  taxes,  means  that,  whereas  the  govern- 
ment before,  in  effect,  offered  say  wheat  (if  the  money  equivalent  is  offered,  our 
conclusion  would  be  the  same)  taken  in  taxes  for  the  desired  linen,  now  it  offers 
nothing.  Both  individual  Canadian  consumers  and  the  Canadian  government 
had  been  offering  wheat  for  linen.  Now  only  the  former  are  doing  so.  The 
people  of  Ireland,  if  the  Canadian  wheat  is  necessary  for  them,  must  now  buy 
as  much  wheat  with  linen  (assuming  them  to  have  nothing  else  exportable)  from 


THE  INCIDENCE  OF  TARIFFS  FOR  REVENUE    49 

of  the  tax,  or  it  might  be  considerably  less  than  the  tax. 
Thus,  the  equilibrium  of  trade  might  be  restored  when 
Canadian  wheat  had  gone  up  to  $1.03  a  bushel,  and 
Irish  linen  down  to  $0.96  a  yard,  making  $1.06  with  the 
tax.  Then  Canadians  would  be  paying  6  cents  of  the 
10  cents  tax  on  each  yard,  but  getting  back  3  cents 
of  it  in  the  higher  price  of  wheat.  Ireland  would  be 
paying  the  larger  part  of  the  tax,  but  Canada  would 
have  failed  to  shift  all  of  it  upon  Ireland. 

Two  conditions,  then,  or  sets  of  conditions,  favor  the 
tax-levying  country  in  any  attempt  to  shift  the  burden 
of  the  tax  upon  the  country  trading  with  it.  In  the 
first  place,  the  tax-levying  country  is  advantaged  by 

the  Canadian  people  individually  as  they  previously  bought  from  individual 
Canadians  and  the  Canadian  government  together.  If  the  Canadian  people, 
as  individuals,  have  a  comparatively  elastic  demand  for  linen,  Ireland  must  offer 
them  for  their  individual  consumption,  besides  what  their  government  gets, 
about  as  much  linen  as  before  per  bushel  of  wheat  or  they  will  not  trade  to  any- 
thing like  the  former  extent.  Ireland  must  therefore  pay  most  or  all  of  the  tax. 
But  Ireland  will  then  only  be  getting  the  wheat  she  previously  got  from  Cana- 
dians as  individuals  and  will  not  be  getting  what  she  previously  got  as  a  result 
of  her  trade  with  the  Canadian  government.  This  additional  amount  she  must 
now  get  (for  we  are  supposing  her  demand  to  be  inelastic)  from  Canadians  as 
individuals,  and  to  do  so  she  must  sell  more  linen.  The  result  may  be,  even 
though  Canada's  demand  for  linen  is  somewhat  elastic,  that  the  marginal  utility 
of  linen  to  Canadian  consumers  falls,  and  that  Ireland  must  offer  more  than 
before,  per  bushel  of  wheat,  besides  paying  the  tax. 

It  is  true  that  if  Canadians  are  released  from  a  tax  they  themselves  previously 
paid,  they  may  want  more  linen  than  before,  but  the  probability  is  that  their 
greater  prosperity  so  resulting  would  be  enjoyed  in  other  ways  also  and  would 
but  slightly  affect  their  demand  for  linen.  And  unless  the  entire  gain  from 
remission  of  the  taxes  formerly  spent  by  the  government  for  linen  were  now 
spent  by  the  Canadian  people  for  additional  linen  beyond  their  previous  indi- 
vidual consumption,  the  new  demand  resulting  from  their  greater  prosperity 
would  not  take  the  place  of  the  former  demand  by  their  government. 

We  cannot  safely  conclude,  therefore,  that  if  the  tax  is  collected  in  kind, 
Ireland  cannot  possibly  lose  more  than  its  equivalent.  As  is  shown  in  the  text, 
any  great  shifting  of  taxes  to  foreign  nations  is  rather  a  theoretical  possibility 
than  a  practical  probability,  but  if  it  is  a  theoretical  possibility  when  collected 
in  money,  it  is  also  a  theoretical  possibility,  and  to  the  same  extent,  when  col- 
lected in  kind. 

PART  II  —  E 


50     ECONOMIC  ADVANTAGES  OF  COMMERCE 

having  a  very  elastic  demand  for  the  goods  of  the  other, 
coupled  with  monopoly  of  consumption  of  the  goods 
of  the  other.1  In  the  second  place,  the  tax-levying  coun- 
try is  aided  if  it  has  a  monopoly  of  production  of  the 
goods  it  sells  while  the  other  country  has  an  inelastic 
demand  for  those  goods.2 

In  practice,  the  conditions  under  which  a  country  can 
shift  all  or  most  of  its  import  taxes  upon  another,  are 
unlikely  to  occur,  or,  at  least,  are  unlikely  to  occur  in 
conjunction.  To  begin  with,  we  cannot  expect  that, 
in  general,  the  country  exporting  the  taxed  product  will 
have  an  inelastic  demand  for  the  product  or  products 
of  the  taxing  country.  And,  secondly,  a  very  slight 
change  in  relative  prices  may  bring  additional  articles 
within  the  demand  of  the  taxing  country,  thus  main- 
taining the  equilibrium  of  trade  nearly  where  it  was 
before.  To  illustrate,  a  slight  rise  of  Canadian  prices 
and  a  slight  fall  of  Irish  prices  may  induce  Canadians 
to  buy  potatoes,  silks,  and  laces,  as  well  as  linen,  in  Ire- 
land. Then  equilibrium  may  result  without  a  sufficient 
change  in  the  rate  of  trade  to  throw  upon  Ireland  much 
of  the  burden  of  the  import  tax. 

Thirdly,  and  probably  most  important  of  all,  the 
taxing  country  cannot  ordinarily  shift  much  of  the  bur- 
den of  its  import  duties  to  another,  because  third  coun- 
tries offer  to  this  other  a  competing  or  alternative  trade. 
Thus,  Canada  probably  cannot  throw  upon  Ireland 
the  burden  of  a  tax  on  Canada's  imports,  because  Ire- 
land has  the  alternative  of  trading  with  India,  Argentina, 
the  United  States,  and  other  countries.  If  Canada 
buys  less  Irish  linen  because  of  the  tax,  so  that  money 

1  Bastable,  The  Theory  of  International  Trade,  fourth  edition,  London  (Mac- 
millan),  1903,  p.  116.  J  Ibid.,  pp.  116,  117. 


THE  INCIDENCE  OF  TARIFFS  FOR  REVENUE     51 

flows  into  Canada  and  Canadian  prices  rise,  Ireland 
will  buy  wheat  of  India,  the  United  States,  Argentina, 
or  Russia,  rather  than  pay  higher  prices  for  Canadian 
wheat.  In  short,  the  Canadian  wheat  producers  must 
take  the  same  prices  charged  elsewhere,  or  export  no 
wheat.1  Likewise,  rather  than  sell  their  linen  to  Canada 
for  a  much  lower  price  than  before,  the  people  of  Ireland 
would  export  more  to  other  markets.  Most,  if  not  all, 
of  the  tax  would  be  pretty  likely  to  fall  upon  the  people 
of  the  taxing  country ;  and  even  if  this  were  not  true, 
the  attempt  to  tax  other  nations  is  a  game  at  which  all 
can  play. 

The  fact  that  other  countries  than  Ireland  and  Canada 
are  to  be  reckoned  with,  means,  also,  that  the  general 
price  level  in  Ireland  would  probably  fall  very  little  as 
a  consequence  of  Canada's  tax.  Though  an  inflow  of 
money  into  Canada  due  to  her  decreased  imports  might 
somewhat  raise  the  level  of  Canada's  prices,  any  corre- 
sponding fall  in  Irish  prices  would  make  Ireland  a  good 
place  to  buy  in  and  would  cause  money  to  flow  from 
third  and  fourth  countries  into  Ireland,  even  if  Cana- 
dians were  prevented  by  their  import  tax  from  buying 
in  Ireland.  The  fall  of  prices  would,  then,  if  it  took 
place,  be  distributed  over  several  countries  and  would 
not  probably  be  confined  to  Ireland.  It  would  be  very 
slight,  therefore,  in  any  country.  The  chief  effect  of 
the  redistribution  of  gold  consequent  on  Canada's  tax 
would  be  seen  in  a  rise  of  Canadian  prices  and  not  in  a 
fall  of  Irish  prices. 

1  The  exact  effect,  in  the  absence  of  any  disturbing  factors,  would  be  a  trans- 
ference, in  part,  of  the  Irish  demand  for  wheat  to  these  other  countries ;  a  very 
slight  increase,  generally,  of  the  price  of  wheat,  and,  therefore,  a  very  slight 
increase  of  the  price  of  the  Canadian  wheat  still  exported ;  and  a  very  slight 
decrease  in  the  price  received  by  Ireland  for  linen. 


52     ECONOMIC  ADVANTAGES  OF  COMMERCE 

§4 
The  Ultimate  Incidence  of  a  Revenue  Duty  on  Exports 

Duties  for  revenue  may  be  levied  on  exports,  if  so 
desired,  as  well  as  on  imports,  though  the  present  prac- 
tice is  to  levy  them  on  imports.  Here,  again,  there  are 
various  possibilities  as  to  shifting.  Suppose  that  Canada 
levies  a  duty  of  ten  cents  a  bushel  on  the  export  of  wheat. 
The  production  of  wheat,  in  Canada,  for  export,  would 
be  decreased,  unless  the  tax  could  be  shifted  upon  foreign 
consumers.  If  the  tax  could  not  be  shifted,  those  wheat 
producers  who  were  making  but  the  usual  return  to 
industry  (the  marginal  producers)  would  change  to 
another  liae  of  production.  If  the  wheat  consumers 
of  Ireland  (and  of  other  countries  getting  their  wheat 
from  Canada)  should  have  an  absolutely  inelastic  demand 
for  wheat  and  could  get  wheat  nowhere  else,  they  would 
pay  the  higher  price  for  wheat  rather  than  not  get  the 
usual  amount  of  it,  and  thereby  would  be  paying  the 
tax.  In  fact,  if  their  demand  were  altogether  inelastic, 
they  would  soon  be  paying  more  than  the  tax.1  For 
the  whole  amount  paid  by  purchasers  of  Canadian  wheat, 
including  the  part  collected  by  the  Canadian  govern- 
ment as  export  tax,  goes  to  Canada.  This  means  that 
if  the  wheat  consumers  of  Ireland  (and  elsewhere)  paid 
the  tax  in  addition  to  what  they  were  previously  paying, 
there  would  be  a  flow  of  gold  into  Canada.  Canadian 
prices  would  rise.  Prices  in  Ireland  would  fall.  Con- 
sumers in  Ireland  would  then  be  paying  more  for  wheat 
by  the  amount  of  the  tax  plus  the  amount  of  rise  (due 
to  gold  flow)  of  net  price ;  while  the  fall  of  Irish  prices 
would  mean  cheaper  linen  for  Canada.    A  bushel  of 

1  Mill,  Principles  of  Political  Economy,  Book  V,  Ch.  IV,  §  6. 


THE  INCIDENCE  OF  TARIFFS  FOR  REVENUE    53 

wheat,  even  after  subtraction  of  the  tax,  would  buy 
more  linen  than  before. 

But  if  Ireland's  demand  for  wheat  is  decidedly  elastic, 
or  can  be  easily  satisfied  from  other  sources  of  supply, 
then  the  increased  price  resulting  from  the  export  tax 
will  cause  an  immediate  falling  off  of  Irish  purchases. 
Let  us  suppose  this  falling  off  of  Irish  demand  to  be 
sufficient  so  that,  even  with  the  addition  to  the  price, 
of  the  tax,  the  money  obligations  from  Ireland  to  Canada 
are  less  than  before.  Then  a  balance  of  gold  will  flow 
from  Canada  to  Ireland.  Canadian  prices  will  fall 
and  prices  in  Ireland  rise.  If  Canadian  demand  for 
linen  is  comparatively  inelastic,  this  flow  and  change  of 
prices  may  go  to  a  considerable  extent  before  Canadian 
demand  for  linen  decreases  and  Irish  demand  for  wheat 
(and  other  Canadian  products)  increases  enough  to 
bring  equilibrium.  At  any  rate,  the  fall  of  Canadian 
and  rise  of  Irish  prices  will  mean  that  at  least  a  part  of 
Canada's  export  tax  has  been  shifted  back  upon  Canada. 
It  is  conceivable  that  Canadian  wheat  will  fall  so  far 
in  price  that,  even  with  the  tax,  Ireland  gets  it  as  cheaply 
as  or  more  cheaply  than  before,  while  Canada  pays  more 
for  Irish  linen.  In  that  case,  Canada,  so  far  from  taxing 
another  country  or  other  countries,  would  herself  lose 
more  than  the  tax.  If  we  assume  Canada  and  Ireland 
to  have  different  standards  of  value,  our  conclusions 
will  be  the  same.1 

It  should  be  clearly  understood  that  the  loss  to  Canada 
(assuming  the  result  just  discussed)  does  not  fall,  if  the 
taxed  article  is  produced  at  nearly  constant  cost,  on  the 
producers  of  that  article  alone.  For  these  producers 
would  refuse  to  accept  lower  returns  and  remain  in  the 

1  Cf.  §  3  of  this  chapter  (III  of  Part  II). 


54     ECONOMIC  ADVANTAGES  OF  COMMERCE 

same  business  when  other  lines  were  more  profitable. 
They  accept  the  lower  prices  when  and  because  the 
outflow  of  money  makes  Canadian  prices,  generally, 
lower. 

But  the  goods  taxed  may  be  produced  under  condi- 
tions of  sharply  increasing  cost  (i.e.  by  some  producers 
less  advantageously  than  by  others).  This  may  be  the 
case  with  wheat,  chosen  as  our  illustration  of  the  taxed 
article.  On  this  assumption,  much  of  the  loss  due  to 
the  tax  may  fall  on  the  owners  of  wheat  lands.  Those 
producing  at  the  margin  of  cultivation  (those  just  mak- 
ing enough  to  keep  them  in  the  industry)  will  refuse  to 
bear  this  loss,  and  will  cease  producing.  Those  producing 
under  more  favorable  circumstances  (on  more  fertile 
or  better  situated  land)  may  prefer  to  suffer  consider- 
able loss  out  of  what  would  have  been  their  surplus  or 
rent,1  rather  than  to  cease  wheat  raising.2  After  the 
tax  has  diminished  foreign  demand  for  Canadian  wheat, 
the  more  advantageously  situated  Canadian  wheat 
producers  can  fill  this  smaller  demand  at  lower  net 
prices  than  before,  and  still  realize,  because  of  their 
advantages  of  soil  and  situation,  a  reasonable  profit.  A 
price  sufficient  to  keep  the  poorer  situated  producers 
in  business,  plus  the  tax,  will  not  be  paid  by  enough 
foreign  consumers  to  take  the  previous  annual  supply 
of  Canadian  wheat.  The  price  will  fall.  Canadian 
owners  of  wheat  lands  will  derive  a  smaller  return  from 
those  lands.  If  there  is  a  surplus  flow  of  gold  from 
Canada,  because  of  excess  purchases  of  Irish  linen  over 
sales  of  Canadian  wheat,  the  price  of  the  wheat  will 
fall  still  further,  along  with  prices  of  other  Canadian 

1  Ci .  Bastable,  The  Theory  of  International  Trade,  p.  i 14. 
*  Cf.  Ch.  II  (of  Part  II),  §  4. 


THE  INCIDENCE  OF  TARIFFS  FOR  REVENUE     55 

goods.     But  it  will  still  be  true  that  a  special  loss  has 
fallen  upon  the  owners  of  wheat  lands.1 

As  in  the  case  of  the  import,  so  in  the  case  of  the  export 
revenue  tax,  we  must  emphasize  the  unlikelihood  that 
a  country  will  be  able  to  shift  the  principal  part  of  its 
tax  burden  upon  other  countries.  So  soon  as  trade 
with  Canada  becomes,  because  of  the  tax,  appreciably 
less  profitable  to  Ireland,  the  latter  country  is  likely 
to  trade  more  with  other  nations  and  communities,  and 
less  with  Canada.  For  this  reason  particularly,  as  well 
as  the  fact  that  the  other  country,  Ireland,  is  quite  as 
likely  as  the  tax-levying  country,  to  have  an  elastic 
demand  for  the  goods  it  imports,  there  is  a  reasonable 
probability  that  the  people  of  each  country  will  them- 
selves have  to  pay,  in  the  main,  the  cost  of  running  their 
own  government  and  carrying  on  its  functions. 

§5 
Summary 

Revenue  tariffs  we  have  classified  as  import  and  export 
tariffs.  A  revenue  tariff,  as  such,  is  expected  to  secure 
revenue  for  government  with  the  least  possible  effect 
on  industry.  A  protective  tariff  is  specifically  intended 
to  turn  industry  into  channels  it  would  otherwise  not 
enter. 

Revenue  tariffs  on  imported  goods  may  fall  on  the 
consumers  in  the  tax-levying  country,  or  may,  under 
certain  hypothetical  circumstances,  fall  upon  the  country 
(or  countries)  exporting  the  taxed  goods.  If  the  demand 
for  the  goods  in  the  taxing  country  is  elastic ;    if  the 

1  In  a  similar  way  it  might  be  shown  that,  even  if  Canada  succeeds  in  throw- 
ing the  main  burden  of  the  tax  upon  Ireland,  owners  of  Canadian  wheat  lands 
might,  as  a  separate  class,  have  their  prosperity  decreased. 


56      ECONOMIC  ADVANTAGES  OF  COMMERCE 

demand  for  the  goods  produced  in  it  is  in  other  coun- 
tries comparatively  inelastic ;  and  if  these  other  coun- 
tries have  no  other  place  to  sell  their  exports  and  buy 
the  goods  they  desire ;  then  the  tax  burden  may  be 
shifted  in  part,  or  in  whole,  or  more,  upon  them.  But 
in  the  actual  commercial  world,  circumstances  are  not 
likely  thus  to  favor  the  tax-levying  country. 

In  the  case  of  tariffs  on  exported  goods,  the  hypotheti- 
cally  possible  consequences  are  not  dissimilar.  A  suffi- 
ciently inelastic  demand  from  other  countries,  for  the 
taxed  goods,  will  throw  upon  them  a  burden  perhaps 
equal  to  or  in  excess  of  the  tax,  to  the  advantage  of  the 
taxing  country.  On  the  other  hand,  the  country  taxing 
its  exports  may,  if  the  foreign  demand  for  the  taxed 
goods  is  elastic  while  its  demand  for  foreign  goods  is 
inelastic,  not  only  pay,  itself,  the  entire  tax,  but  may  also 
carry  on  its  trade  with  foreign  countries  at  a  less  favor- 
able rate  of  interchange  to  it,  than  before.  The  general 
rule  probably  is  that  a  government  is  mainly  supported 
by  those  subject  to  it.  If  it  were  possible  to  support 
government  by  shifting  taxes  upon  foreign  countries, 
all  nations  would  be  likely  to  attempt  it,  with  consequent 
cancellation  or  partial  cancellation  of  effects. 


CHAPTER   IV 

The  Effect  of  a  Protective  Tariff  on  National 
Wealth 

§i 

The  Effect  of  a  Protective  Tariff  on  a  Country's  Export 

Trade 

In  discussing  the  protective  tariff,  a  natural  starting 
point  is  the  question  of  its  effect  on  the  supply  of  goods 
brought  from  foreign  countries.  A  purely  revenue  tariff 
is  intended  to  have  the  least  possible  effect  on  the  flow 
of  trade.  A  protective  tariff  prevents  goods  from  coming 
into  the  "protected"  country,  is,  in  fact,  particularly 
intended  so  to  do,  by,  in  effect,  fining  the  importers. 
Thus,  a  Canadian  tariff  on  linen  of  50  cents  a  yard 
may  be  said  to  fine  the  importers  of  linen  to  that  extent. 
This  discourages  importation  and  so  tends  to  decrease, 
in  Canada,  the  supply  of  linen.  In  consequence  of  the 
decreased  supply  of  linen  in  Canada,  the  price  advances. 
Either  it  must  advance  by  about  the  equivalent  of  the 
tax,1  or  the  linen  will  not  be  imported.  This  high  price, 
however,  causes  a  falling  off  in  the  demand  for  linen 
brought  from  abroad,  and  a  shifting  of  this  demand 
to  the  home  product.  If  linen  from  Ireland  was  $1.00 
and  cannot  now  be  sold  for  less  than  $1.50,  and  if  Cana- 
dians can  manufacture  it  profitably  for  $1.43,  the  sales 

1  See,  however,  discussion  in  this  chapter  (IV  of  Part  II),  §§    6  and  7.     Cf. 
Ch.  Ill  (of  Part  II),  §  3- 

57 


58      ECONOMIC  ADVANTAGES  OF  COMMERCE 

of  Canadian  linen  in  Canada  will  increase.  Canadian 
production  is  thus  encouraged,  by  government  aid,  to 
follow  a  line  which  it  otherwise  would  not. 

This  purposeful  interfering  with  importation  disturbs 
the  previously  existing  equilibrium  of  trade  conditions. 
Canada,  for  a  time,  continues  to  export  wheat  or  other 
goods,  though  refusing  to  import  much  linen.  Gold, 
therefore,  flows  out  of  Ireland  and  into  Canada.  This 
raises  Canadian  prices  and  lowers  prices  in  Ireland.1 
The  prices,  therefore,  of  goods  which  Canada  has  ex- 
ported, e.g.  wheat,  may  rise  so  high  that  the  Irish  and 
other  foreign  demand,  if  it  does  not  cease,  will  at  least 
grow  smaller.  Or,  if  some  of  these  goods,  such  as  wheat, 
cannot  be  sold  abroad  even  in  smaller  quantities  for  a 
higher  price  than  before,  because  of  competition  from 
other  sources  of  supply,  then  the  higher  money  cost  of 
production  in  Canada  will  cause  production  for  a  foreign 
market  to  decrease.  In  the  long  run,  by  so  much  as  a 
protective  tariff  directly  limits  imports,  by  just  so  much 
will  it  indirectly  injure  the  levying  country's  export 
trade.2    This  is  true  whether  the  different  trading  coun- 

1  Or,  if  there  is  a  general  tendency  for  prices  to  fall,  as  from  a  more  rapid 
increase  of  trade  than  of  money,  Canadian  prices  fall  less  than  do  Irish  prices ; 
while,  if  there  is  a  general  tendency  for  prices  to  rise,  Canadian  prices  rise  more 
than  Irish  prices.  The  essential  fact  is,  that  Canadian  prices  rise  by  comparison 
with  Irish  prices,  while  Irish  prices  fall  by  comparison  with  Canadian  prices.  It 
would  complicate  and  make  harder  to  follow  our  arguments  to  add  this  expla- 
nation in  each  chapter  throughout  Parts  I  and  II,  but  the  reader  may,  with 
advantage,  bear  it  in  mind. 

2  Whatever  goods  continue  to  be  exported  until  Canadian  prices  have  appre- 
ciably risen,  would  more  probably  be  goods  produced  under  conditions  of  in- 
creasing cost  and  goods  in  which  competition  from  other  sources  of  supply  would 
not  prevent  Canadian  sales  even  at  somewhat  higher  prices  than  before.  If 
all  goods  were  produced  under  conditions  of  absolutely  constant  cost  and  could 
be  secured  equally  well  from  other  sources,  if  society  were  in  a  state  of  economic 
equilibrium,  and  if  there  were  no  economic  friction,  then  Canadian  prices  could 
i  hange  only  infinitesimally  as  a  result  of  money  inflow  caused  by  the  tariff.     For 


PROTECTION  AND  NATIONAL  WEALTH       59 

tries  have  a  common  standard  of  value,  or  unrelated 
monetary  systems,  or  no  monetary  systems.  The 
Irish  manufacturers  of  linen  will  be  forced  by  the  more 
direct  action  of  the  tariff  to  seek  markets  elsewhere 
than  in  Canada.  The  Irish  consumers  of  wheat  will 
soon  make  use  of  the  alternative,  in  case  an  inflow  of 
gold  into  Canada  raises  wheat  prices  there  (or,  if  the 
currencies  are  unrelated,  in  case  more  Irish  money  than 
before  is  required  to  buy  a  given  amount  of  Canadian 
money),  of  buying  their  wheat  elsewhere.  The  result,  to 
Canada,  is  the  loss  of  what  had  been  a  profitable  trade. 
The  establishment  of  a  few  protected  industries  may 
serve  to  discourage  or  cripple  many  unprotected  indus- 
tries, for  it  means  higher  money  prices  and  a  consequent 
disadvantage  to  all  lines  of  export  trade.  Among  other 
things,  the  services  of  a  country's  mercantile  marine 
may  be  regarded  as  exports  of  that  country,  in  so  far  as 
these  services  are  rendered  to  and  are  paid  for  by,  the 
people  of  other  countries.  This,  like  other  parts  of  a 
country's  export  trade,  is  affected  unfavorably  if  the 
country  follows  the  protective  tariff  policy.  Besides 
the  injurious  effect  resulting  from  the  general  rise  of 
money  prices  in  the  protected  country,  on  the  exporta- 
tion of  any  of  that  country's  products,  there  is  the  special 
discouragement  which  results  if  the  production  of  these 
exportable  goods  requires  the  use  of  machinery  or  raw 
material  directly  raised  in  price  by  a  tariff  upon  it. 

the  least  tendency  to  rise  of  costs  would  at  once  turn  all  producers  away  from 
lines  of  production  for  a  foreign  market  in  which  prices  could  not  be  made  to 
rise  equally  fast,  and  prices  in  foreign  markets,  of  the  goods  in  question,  would 
not  rise  if  the  goods  could  be  secured  in  larger  quantity  from  other  sources,  at 
no  greater  cost  than  before.  A  protective  tariff  which  prevented  imports  would 
immediately  stop  exports.  Under  existing  conditions,  exports  would  be  corre- 
spondingly decreased  by  an  import  tariff  only  after  an  appreciable  lapse  of 
time. 


60     ECONOMIC  ADVANTAGES  OF  COMMERCE 

A  high  export  tariff,  intended  to  prevent  exports, 
would  eventually,  like  a  protective  import  duty,  decrease 
both  exports  and  imports,  but  the  export  duty  would 
decrease  exports  first.  The  diminution  of  exports  would 
mean  a  temporary  net  outflow  of  specie  from  the  duty- 
levying  country.  Finally,  prices  in  that  country  would 
be  so  low  that  its  people  would  more  largely  supply 
themselves  with  desired  goods  and  would  buy  less  goods 
abroad.1  It  is  not  essential,  however,  that  we  should 
consider  at  length  the  effects  of  high  export  duties,  be- 
cause, while  there  have  been  examples  of  such,  they  have 
been  much  less  common  than  high  import  duties,  and 
are,  at  present,  almost  unknown. 

How  a  Protective  Tariff  Sets  Up  Unprofitable  Industries 
at  the  General  Expense 

The  fairly  direct  and  practically  immediate  effect  of  a 
protective  tariff  is  to  raise  the  prices  of  protected  goods 
by  not  more  than  the  amount  of  the  tariff.  As  we  have 
seen,  if  Canada  levies  a  50  cents  tax  per  yard  on  linen, 
to  protect  Canadian  linen  production,  an  almost  imme- 
diate result  is  that  Canadian  linen  manufacturers  can 
charge  more  for  linen  than  otherwise  they  would  be  able 
to.  For  the  50  cents  tax  has,  as  a  first  consequence,2 
that  linen  from  Ireland  must  sell  for  $1.50  instead  of  Si 
a  yard.  The  tax,  therefore,  makes  it  possible  for  Cana- 
dian linen  producers  to  charge  prices  (except  as  hindered 

1  With  a  combination  of  high  protection  on  all  importable  goods,  and  high 
restrictive  export  taxes,  the  prices  of  protected  goods  would  rise  because  of  their 
greater  scarcity,  but  there  would  be  no  rise  of  other  prices  due  to  inflow  of  gold 
nor  any  fall  of  prices  due  to  its  outflow. 

2  See,  however,  §§  6  and  7  of  this  chapter  (IV  of  Part  II). 


PROTECTION  AND  NATIONAL  WEALTH      61 

by  competition  with  each  other)  higher  in  about  the 
same  proportion.  Without  the  tariff  protection,  Cana- 
dian linen  producers  must  sell  for  $i  a  yard  or  less,  if 
they  would  have  the  home  market.  If  all  of  them  were 
willing  to  do  this,  if  employing  manufacturers  and  their 
employees  were  willing  to  manufacture  linen  for  an 
average  return  of  $14  a  week,  or  less,  they  could  carry 
on  a  large  business  and  perhaps  almost  monopolize 
the  home  market,  even  without  a  tariff.  But  the  tariff, 
by  compelling  a  rise  in  the  imported  linen  to  $1.50,  en- 
ables the  now  protected  Canadians  to  charge  (say) 
$1.43,  and  still  be  sure  of  most  of  the  Canadian  market. 
Under  Schedule  K  of  the  late  Payne-Aldrich  tariff  law,  it 
was  found  by  the  Tariff  Board  that  an  average  duty  of 
184  per  cent  levied  by  the  United  States  on  16  varieties 
of  woolen  fabrics,  resulted  in  an  average  price  for  the 
home-produced  goods  67  per  cent  higher  than  the  price 
of  like  goods  abroad.1  The  tariff  has  in  this  regard  about 
the  same  effect  as  natural  barriers  and  resulting  high 
cost  of  transportation.  Either  natural  barriers  or  the 
artificial  barriers  of  a  protective  tariff  act  tend  to  make 
more  difficult  to  get  and  more  expensive  in  one  country, 
the  products  of  another,  and,  therefore,  to  enable  the 
home  producer  to  charge  higher  prices.  The  late  Pro- 
fessor William  Graham  Sumner  of  Yale  college  called 
attention  to  the  fact  that,  after  the  St.  Gothard  tunnel 
was  opened,  the  people  of  southern  Germany  petitioned 
for  higher  taxes  on  Italian  products  so  as  to  offset  the 
greater  cheapness  made  possible  by  the  tunnel.2 
The  protective  tariff  on  linen  makes  Canadian  manu- 

1  Report  of  the  Tariff  Board  on  Schedule  K  of  the  Tariff  Law,  1912,  Vol.  I. 
Part  I,  p.  14. 

2  Protectionism,  New  York  (Holt),  188s,  PP-  75.  76. 


62     ECONOMIC  ADVANTAGES  OF  COMMERCE 

facture  of  the  linen  much  more  profitable  than  it  would 
else  be,  since  it  enables  the  Canadian  manufacturers  to 
charge  much  higher  prices.  It  therefore  diverts  a  cer- 
tain amount  of  Canadian  labor  and  capital,  from  the 
production  of  wheat  and  from  other  lines,  into  the  pro- 
duction of  linen.  As  has  already  been  suggested,  if 
Canadians  want  to  go  into  the  linen  making  industry 
and  take  what  the  industry  will  yield  them  in  open  com- 
petition, they  can  do  so  without  the  tariff.  But  though 
they  can,  it  is  obvious  that  they  will  not.  For,  by  our 
familiar  assumption,  a  week's  labor  in  Canada  will 
produce  20  bushels  of  wheat,  and  will  therefore  earn,  if 
wheat  sells  for  $1  a  bushel,  $20.  A  week's  labor  will 
produce,  however,  but  14  yards  of  linen.  If  linen  is 
but  $1  a  yard  or  less,  the  week's  earnings  are  but  $14. 
Without  the  tariff,  therefore,  Canadians  can  go  into 
linen  production  if  they  want  to,  and  they  may  be  able 
to  make  a  fair  living  at  it ;  but  they  will  not  want  to, 
for  the  reason  that  they  can  make  very  considerably 
more  in  another  line,  viz.  the  production  of  wheat. 
The  tariff,  by  enabling  them  to  get  $1.43  a  yard  or  more, 
though  at  the  expense  of  43  cents  a  yard  to  every  Cana- 
dian purchaser  of  linen,  makes  the  business  as  profitable 
as  the  other,  or  more  so,  and  induces  some  Canadians 
to  take  it  up.  A  protective  tariff,  therefore,  causes  the 
development  of  an  industry  in  a  location  or  country 
where  it  would  not  otherwise  exist,  by  making  possible 
higher  prices  and  correspondingly  higher  returns  to 
that  industry,  and  in  that  way  alone.  Under  free  trade 
conditions,  the  location  of  various  industries  within 
different  countries  is  determined,  as  we  have  seen,  by 
the  principle  of  relative  efficiency  in  production.  The 
greatest  profitable  degree  of  geographical  specialization 


PROTECTION  AND  NATIONAL  WEALTH       63 

results.  Under  protection,  this  specialization  is  pur- 
posely interfered  with,  and  what  industries  shall  be 
developed  and  maintained  in  the  protective  tariff  coun- 
try depends,  in  large  part,  on  governmental  favor. 

The  general  principle  of  free  trade  follows  directly 
from  what  we  have  learned  of  the  benefits  of  international 
trade.  Geographical  specialization,  so  far  as  it  develops 
naturally  under  free  trade  conditions,  yields  a  larger 
total  product  than  local  or  national  self-sufficiency ;  and 
of  this  larger  product  the  several  trading  nations  secure 
each  a  share.  Protection  prevents  this  specialization, 
makes  impossible  the  securing  of  the  larger  total  product, 
and,  therefore,  makes  the  protected  country  in  so  far 
poorer. 

To  illustrate,  consider  again  Canada's  50  cents  pro- 
tective duty  on  linen.  Before  the  laying  of  this  duty, 
the  average  Canadian  could  produce,  in  a  week,  20 
bushels  of  wheat,  worth  $20,  and  get,  by  sale  and  pur- 
chase, 20  yards  of  linen  in  return.1  With  two  weeks  of 
work,  he  could  secure  20  bushels  p  us  20  yards.  After 
the  protective  tax  is  laid,  he  is  practically  compelled  to 
buy  linen  in  Canada  at  $1.43  a  yard.  He  can  still 
produce  20  bushels  of  wheat  in  a  week  and  get  his  $20, 
but  for  the  $20  he  can  get  only  14  yards  of  linen.  Two 
weeks  of  work  will  net  him  20  bushels  plus  14  yards, 
which  is  6  yards  less  2  than  if  the  tariff  did  not  exist. 

Neither  can  it  be  said  that  the  Canadians  who  are 
tempted  into  linen  manufacturing  gain  any  more  than,  or 
as  much  as,  the  wheat  producers  lose.  For  we  have  seen 
that  those  who  care  to  manufacture  linen,  employers  and 
employees,  can  have  all  the  business  they  want  and  all 

1  Minus  cost  of  transportation,  etc. 

2  Ignoring  cost  of  transportation,  etc. 


64      ECONOMIC  ADVANTAGES  OF  COMMERCE 

the  employment  they  want,  without  the  tariff,  if  they 
will  sell  the  linen  at  a  low  enough  price,  say  $r  or  less  a 
yard,  and  take  what  the  business  will  earn,  as  wages  and 
profits,  viz.  about  $14  a  week  (or  perhaps,  if  they  wish 
to  keep  linen  from  Ireland  entirely  out  and  monopolize 
the  market,  somewhat  less).  If  the  tariff  enables  them 
to  get  $1.43  a  yard  instead  of  $1,  the  best  that  can  pos- 
sibly be  said  for  the  tariff  is  that  it  gives  the  linen  makers 
43  cents  for  every  43  cents  it  takes  away  from  the  wheat 
raisers  or  others  who  buy  the  linen.  If  there  is  any  way 
by  which  protection  can  give  43  cents  to  any  protected 
interest,  without  taking  at  least  43  cents  away  from  some 
person  or  persons  buying  the  taxed  article,  the  exact 
manner  in  which  protection  does  this  should  be  carefully 
set  forth  by  defenders  of  the  policy.  The  late  Professor 
Sumner  said:1  "If  Protection  is  anything  else  than 
mutual  tribute,  then  it  is  magic." 

But  protection  does  worse  than  take  from  one  person 
in  the  protectionist  country  exactly  what  it  gives  to 
another.  In  our  illustration,  protection  does  worse  than 
take  from  the  Canadian  wheat  producers  exactly  what 
it  gives  to  the  Canadian  linen  manufacturers.  It  takes 
more  from  the  wheat  raisers  than  it  gives  to  those  who 
become  linen  producers.  The  wheat  raisers  have  to  pay 
43  cents  extra  on  every  yard  bought,  in  order  that  the 
linen  makers  may  receive  $1.43  for  what  would  other- 
wise be  $1  worth  of  linen,  or  $20  a  week  in  an  occupa- 
tion that  would  otherwise  yield  only  $14.  But,  by 
hypothesis,  they  could  earn  $20  anyhow,  if  they  would 
remain  in  the  business  of  wheat  production.  Therefore, 
the  people  who  do  engage  in  wheat  production  have  to 
lose  $6  on  20  yards  of  linen  in  order  that  others  may 

1  Protectionism,  p.  160. 


PROTECTION  AND  NATIONAL  WEALTH      65 

secure  $20  a  week  at  linen  manufacturing,  when  these 
others  could  secure  $20  a  week  in  wheat  production 
without  taxing  any  one  else.  It  would  seem  certain, 
then,  that  the  taxed  class  loses  more  than  the  protected 
class  gains,  if  indeed  the  latter  class  gains  anything  at 
all.  What  the  situation  amounts  to,  in  our  illustration, 
is  that  the  people  in  one  industry  are  taxed  to  encourage 
and  keep  going  another  industry  which  pays  so  ill  that 
no  one  in  the  country  would  go  into  it  if  it  were  not 
favored  by  this  policy.  This  is  what  Professor  Sumner 
had  in  mind  when  he  said  that,  by  the  whole  logic  of  the 
protectionist  system,  the  industries  to  be  aided  are  "the 
industries  which  do  not  pay,"  l  and  that  the  process,  so 
called,  of  "creating  a  new  industry"  means  simply  the 
taking  of  one  industry  and  setting  it  "as  a  parasite  to 
live  upon  another."  - 

Various  facts  brought  out  by  the  investigations  of  the 
Tariff  Board  would  seem  to  show  that  the  establishment 
in  the  United  States  by  the  protective  tariff,  of  the  wool 
manufacturing  industry,  has  thus  been  the  establishment 
of  a  parasitic  industry  at  the  general  expense.  We  have 
already  seen  3  that  many  woolen  goods  have  been  greatly 
raised  in  price  because  of  the  exclusion,  by  protection, 
of  foreign  goods.  The  home  producers  must  receive 
these  higher  prices  in  order  that  they  may  receive,  as  a 
whole,  as  large  returns  as  they  might  otherwise  have 
secured  in  unprotected  lines ;  in  particular,  they  must 
charge  these  prices  in  order  that  the  wages  paid  to  em- 
ployees may  be  high  enough  to  keep  the  latter  in  the 
wool  manufacturing  business,  and,  therefore,  that  the 
wages  may  be  as  high  as  can  be  got  in  other  employments. 

1  Protectionism,  p.  48.  2  Ibid.,  p.  45. 

J  §  2  of  this  chapter  (IV  of  Part  II). 
PAfiT  11  —  F 


66      ECONOMIC  ADVANTAGES  OF  COMMERCE 

Since  wages  in  general  in  the  United  States  are  high  and 
since  American  woolen  manufacturing  concerns  seem 
to  have  no  special  advantages  either  in  equipment  or  in 
efficiency  of  labor  over  their  foreign  rivals,1  it  follows 
that  the  cost  per  yard  of  woolen  cloth  made  in  this  coun- 
try is  high.  According  to  the  estimates  of  the  Tariff 
Board,2  the  cost  of  turning  wool  into  tops  is  about  80  per 
cent  more  here  than  in  England,  of  producing  yarn  from 
the  tops  about  100  per  cent  more,  and  of  manufacturing 
the  yarn  into  cloth  from  66  to  1 70  per  cent  more,  accord- 
ing to  the  kind  of  fabric  in  question.  The  effect  of  pro- 
tecting the  woolen  manufacturing  industry  in  the  United 
States  has  been,  therefore,  that  the  consumers,  that  is, 
the  Americans  engaged  in  all  other  lines  of  industry, 
have  had  to  pay  much  higher  prices  for  woolen  goods 
than  would  otherwise  be  necessary,  merely  that  those 
engaged  in  the  woolen  industries  might  receive  as  high 
profits  and  wages  as  they  could  get  even  without  pro- 
tection in  other  lines  of  activity.  Were  it  not  for  pro- 
tection they  would  have  been  engaged  in  these  other 
lines  of  activity,  perhaps  largely  in  the  production  of 
articles  for  export,  in  transportation,  and  in  various 
commercial  pursuits.  Protection  has  drawn  them  out 
of  these  lines  at  a  very  considerable  loss  to  the  rest  of 
the  nation  and  with  no  appreciable  permanent  gain  to 
them,  if  indeed  they  have  not  eventually  shared  in  the 
general  loss.  It  would  appear  certain,  therefore,  that 
in  this  instance,  as  in  general,  protection  has  imposed  a 
cost  upon  those  in  unprotected  industries,  greater  than 
any  gain  which  it  can  be  asserted  to  have  brought  to 
those  in  the  lines  protected. 

1  Report  of  the  Tariff  Board  on  Schedule  K  of  the  Tariff  Law,  Vol.  I,  Part 
I.  p.  16.  *  Ibid.,  pp.  16,  17. 


PROTECTION  AND  NATIONAL  WEALTH      67 

§3 

The  Effect  of  Protection  on  the  Money  Prices  of  Pro- 
tected Goods  and  on  the  Money  Prices  of  Unprotected 
Goods 

For  a  brief  time  after  a  protective  tariff  is  levied  on 
imports,  the  protected  country,  e.g.  Canada,  will  export 
about  as  much  as  if  trade  were  free ; *  but  such  a  flow  of 
exports  will  not  be  continuous.  When,  as  a  result  of 
the  tariff,  Canada  diminishes  its  importations,  there  will 
be,  as  has  been  sufficiently  explained,  a  net  inflow  of 
gold.  Canadian  prices  rise  as  compared  to  foreign 
prices,  and,  if  the  amount  of  trade  and  other  factors 
remain  the  same,  rise  in  exact  proportion  to  the  increase 
of  money.  If,  for  any  reason,  prices  do  not  at  once 
become  higher  than  before  relatively  to  prices  abroad, 
the  gold  inflow  will  continue  until  they  do.  And  when, 
because  of  the  increase  of  money,  prices  rise,  this  rise 
of  prices  will  affect  protected  and  unprotected  goods 
alike.  The  increase  of  money,  with  no  corresponding 
increase  of  other  wealth,  must  mean  rise  of  prices  of 
other  wealth,  else,  with  the  greater  amount  of  money, 
the  demand  for  this  wealth  would  exceed  the  supply. 
And  as  far  as  the  increase  of  money  by  itself  is  concerned, 
it  would  affect  all  prices  in  Canada  to  the  same  extent. 
The  primary  effect,  then,  of  the  assumed  tariff,  is  to 
raise  the  price  of  linen,  in  Canada,  from  $i  to  $1.43  a 
yard,  while  not  affecting  the  price  of  wheat.  The 
secondary  effect   results   from   the   inflow   of  money.2 

1  See  §  1  (and  footnotes)  of  this  chapter  (IV  of  Part  II). 

1  CI.  The  Purchasing  Power  of  Money,  by  Irving  Fisher  assisted  by  Harry  G. 
Brown,  New  York  (Macmillan),  191 1,  p.  94.  In  justification  of  the  above  mode 
of  presentation,  it  may  be  said  that  the  drawing  of  labor  into  the  protected  in- 
dustry (hnen  production),  cannot  permanently  raise  the  prices  of   unprotected 


68      ECONOMIC  ADVANTAGES  OF  COMMERCE 

Suppose  money  in  Canada  increases,  because  of  the 
tariff,  by  10  per  cent.  Then  the  price  of  Canadian  wheat, 
assuming  it  to  be  produced  at  approximately  constant 
cost  per  bushel *  regardless  of  whether  somewhat  less  or 
somewhat  more  is  produced,  would  tend  to  rise  from  $i 
to  $1.10  a  bushel;2  and  the  price  of  linen  would  rise, 
in  addition  to  the  rise  directly  occasioned  by  the  tariff, 
from  $1.43  to  $1.57  a  yard,  i.e.  in  the  same  ratio  as  the 
price  of  wheat.  How  largely  the  prices  of  unprotected 
goods  produced  in  the  United  States  have  thus  been 
made  higher  by  this  indirect  action  of  the  tariff,  it  is 
impossible  to  say,  but  that  the  prices  of  many  such  goods 
have  been  so  raised  to  some  extent,  we  may  reasonably 
conclude. 

Here  we  are  brought  again,  by  a  somewhat  different 
route,  to  the  conclusion  that  a  protective  tariff  tends 
towards  national  poverty.  For,  while  the  increased 
quantity  of  money  tends  to  raise  all  money  incomes  in 
the  same  ratio  that  it  raises  the  prices  of  goods,  and  so 
tends  to  leave  people  in  the  same  relative  position ;  yet 
the  original  and  special  rise  in  the  prices  of  the  protected 

goods,  e.g.  wheat,  by  decreasing  the  supply  of  these  goods,  unless  there  is  this 
inflow  of  specie.  For  no  one,  by  our  hypothesis,  will  leave  the  production  of 
wheat  at  $1  a  bushel  unless  he  can  get  $1.43  a  yard  for  linen,  and  no  one  would 
leave  the  production  of  wheat  at  any  higher  price  than  $1  unless  he  could  secure 
more  than  $1.43  for  the  cloth.  But  a  rise  of  wheat  above  $1  a  bushel  and  of 
cloth  above  $1.43  and  of  other  things  in  proportion,  could  not  take  place  without 
a  changed  relation  between  currency  and  goods,  without,  that  is,  in  this  case, 
an  inflow  of  money  metal.  A  continued  foreign  demand  for  the  now  less  produced 
wheat  might  cause  a  rapid  readjustment,  but  could  cause  such  readjustment 
only  through  purchases  of  the  wheat  (or  other  Canadian  goods),  and,  therefore, 
only  by  influencing  the  flow  of  gold. 

1  At  the  margin  of  cultivation. 

2  We  are  supposing  that  the  inflow  of  money  takes  place  to  such  an  extent 
as  to  have  this  result,  either  because  Canada  continues  to  export  wheat  until 
the  price  of  Canadian  wheat  has  thus  risen  10  per  cent,  or  because  Canadian 
exports  of  other  goods,  perhaps  goods  less  subject  to  the  competition  of  other 
sources  of  supply,  do  not  at  once  cease. 


PROTECTION  AND  NATIONAL  WEALTH       69 

goods  is  due  solely  to  the  greater  scarcity  of  those  goods 
and  the  greater  cost  of  their  production,  and  is  not  coun- 
terbalanced by  any  increase  of  money  incomes.  There 
is  here  a  net  loss.  The  country  is  poorer  because  of 
the  tax. 

If  Canada  has  an  inconvertible  paper  money,  then 
the  protective  tariff  will  have  the  same  primary  effect  but 
a  different  secondary  effect.  It  will  raise  the  price  of 
linen  from  $1  to  $1.43  without  changing  other  prices. 
There  will  be  no  increase  of  money  due  to  a  surplus  of 
exports.  Linen  will  rise  in  price  because  of  the  greater 
cost  of  production  required  and  the  greater  scarcity  of 
it  in  relation  to  other  goods  and  to  money.  But  wheat 
and,  in  general,  goods  other  than  linen  will  not  rise  in 
price.1  Instead  of  a  general  rise  in  money  prices  bring- 
ing eventual  equilibrium  by  discouraging  purchase  of 
Canadian  goods  from  abroad,  this  equilibrium  will  be 
brought  by  a  change  in  the  relative  values  of  currency,  of 
such  a  sort  that  it  requires  more  foreign  money  to  pur- 
chase a  given  amount  of  exchange  on  Canada  or  to  pur- 
chase the  gold  equivalent  of  a  given  amount  of  Canadian 
money.2 

As  we  have  already  seen,3  a  high  export  tariff  would 
act  in  a  way  directly  contrary  to  the  operation  of  pro- 
tection, on  the  flow  of  specie  and  on  money  prices  in  the 
tax-levying  country.  While  protection  causes  an  inflow 
of  specie  and  a  rise  of  money  prices,  high  export  duties 
would  cause  an  outflow  of  specie  and  a  fall  of  money 
prices.  But  in  its  effect  on  national  prosperity,  a  high 
export  tariff  would  not  require  to  be  thus  sharply  dis- 

1  Assuming  production  under  constant  cost. 
»  See  Part  I,  Ch.  VI,  §§  6,  7,  8,  9. 
3  §  1  of  this  chapter  (IV  of  Part  II). 


70     ECONOMIC  ADVANTAGES  OF  COMMERCE 

tinguished  from  protection.  It  would,  as  protection 
does,  turn  industry  out  of  its  natural  channels  into  less 
productive  channels.  The  difference  is  that,  while  the 
method  of  protection  involves  a  selection  of  industries 
to  be  established  at  the  general  expense,  a  high  export 
tariff  would  secure  the  establishment  of  new  and  less 
profitable  industries,  indirectly,  by  preventing  produc- 
tion for  export  in  the  industries  most  profitable.  Export 
restrictions  have  been  applied,  in  the  past,  along  with 
restrictions  on  imports,  to  divert  labor  from  a  relatively 
large  production  of  raw  materials,  into  the  manufacture 
of  those  materials.  England's  statutory  law,  from  the 
time  of  Edward  III  through  many  generations,  forbade 
the  export  of  sheep  or  raw  wool,  while  aiming  to  prevent 
importation  of  woolen  cloth.1  The  desire  was  to  stimu- 
late the  making  of  woolen  cloth  in  England. 

It  is  worth  pointing  out  that  a  high  tariff  levied  by 
a  country  upon  its  exports,  affects  that  country  as  to 
money  prices  and  general  prosperity,  in  the  same  way  as 
high  import  duties  levied  on  the  same  articles  of  its 
production  by  all  the  countries  with  which  it  trades. 
A  high  export  duty  levied  by  Canada  on  wheat,  would 
have  the  same  effect  as  high  import  duties  on  this  wheat 
levied  by  other  countries ;  it  is  indeed  equivalent  to  a 
combination  of  all  possible  consuming  countries  to  levy 
such  an  import  duty  against  Canada.  Similarly,  a 
high  import  tax,  i.e.  a  "protective  tariff,"  is  equivalent 
to  high  export  duties  levied  by  not  one  only  but  all 
other  countries  from  which  the  taxed  goods  might  come. 

1  Levi,  The  History  of  British  Commerce,  second  edition,  London  (John  Mur- 
ray), 1880,  pp.  22,  23,  footnote;  also  Day,  A  History  of  Commerce,  New  York 
(Longmans,  Green  &  Co.),  1907,  p.  225. 


PROTECTION  AND  NATIONAL  WEALTH       71 

§4 

Protection  to  Industries  in  which  Large  Scale  Production 
is  Advantageous 

When  a  protected  industry  is  one  of  those  in  which 
large  scale  production  is  advantageous,  there  are,  as 
regards  the  carrying  on  of  the  industry  in  the  protection- 
ist country,  two  possibilities.  The  first  possibility  is 
that  the  encouragement  and  further  extension  of  home 
production  in  that  industry  will  mean  home  production 
on  a  larger  scale  than  formerly,  i.e.  few,  if  any,  more 
plants,  but  larger  product  turned  out  by  each  plant. 
If  the  tariff  has  this  effect,  it  means  cheaper  home  pro- 
duction than  before,  and,  if  the  improvement  is  great 
enough,  cheaper  production  at  home  than  abroad.1 

The  second  possibility  is  that  the  size  of  establishment 
having  the  greatest  efficiency  is,  on  the  average,  already 

1  There  is  another  conceivable  case,  which  may  properly  be  mentioned  at  this 
point,  where  protection  might  really  increase  national  wealth.  Suppose  a  coun- 
try to  be  carrying  on  only  one  or  a  few  industries  and  to  be  the  only  country 
where  these  industries  are  carried  on.  Those  engaged  in  them,  however,  we 
shall  assume  to  be  subject  to  competition  from  others  in  their  own  country.  In 
such  a  case,  a  protective  tariff  which  should  divert  labor  into  a  line  unprofitable 
without  such  aid,  might  so  restrict  the  supply  of  the  goods  of  which  the  country 
had  a  monopoly,  as  to  raise  very  greatly  the  prices  of  those  goods  abroad  and  so 
increase  the  country's  prosperity  at  the  expense  of  foreigners.  But  unless  the 
country  had  a  monopoly  of  the  industries  from  which  labor  is  turned,  it  could 
not  appreciably  raise  the  prices  of  the  goods  by  so  doing,  for  the  competition  of 
other  sources  of  supply  would  keep  the  prices  down.  Furthermore,  unless  most 
of  the  industries  in  which  the  protectionist  country  is  engaged  are  industries 
in  which  it  has  a  monopoly,  the  establishment  of  new  industries  by  protection 
will  draw  from  other  lines  as  well  as  from  the  monopoly  lines,  and  will  therefore 
not  so  much  decrease  the  supply  of  goods  in  the  monopoly  lines  and  not  so  much 
raise  their  prices.  If  a  country  has  a  monopoly  of  only  one  or  a  few  lines  and 
those  not  important,  and  the  situation  is  almost  certain  to  be  no  more  favorable 
than  this  to  the  protectionist  country,  then  the  effect  of  protection  will  so  little 
decrease  the  supplies  of  the  monopolized  goods  as  to  have  slight  appreciable 
effect  on  their  prices.  In  short,  as  things  are  in  the  actual  civilized  world,  the 
circumstances  under  which  protection  can  be  reasonably  expected  to  increase 
national  wealth  probably  nowhere  exist. 


72     ECONOMIC  ADVANTAGES  OF  COMMERCE 

reached  before  protection  is  granted,  or,  if  it  is  not,  that 
lack  of  a  tariff  is  not  the  difficulty.  On  this  assumption, 
the  imposition  of  a  tariff  would  very  probably  result  in 
an  increase  of  the  number  of  plants  engaged  in  the  in- 
dustry within  the  protectionist  country,  but  not  in  any 
saving  through  more  efficient  plants.  By  hypothesis, 
increased  size  of  plants,  beyond  that  already  reached, 
is  no  longer  a  saving,  or  will  not  be  brought  about  by 
protection.  If  the  industry  was  being  carried  on  within 
the  country  to  any  appreciable  extent,  before  the  adop- 
tion of  a  protective  policy,  a  change  in  the  average  size 
of  establishments,  as  a  result  of  that  policy,  cannot  be 
regarded  as  assured.  In  any  case,  the  development  of 
efficiency  resulting  from  larger  scale  production  must, 
if  it  is  to  yield  any  net  gain  to  the  nation  in  question,  be 
so  great  that  the  desired  goods  can  be  secured  at  home 
more  cheaply  than  they  could  otherwise  be  imported. 
Large  scale  production  in  other  countries  and  purchase 
of  the  goods  from  them  may,  in  practice,  better  secure 
the  national  welfare. 

§5 

Protection  to  Industries  of  Increasing  Cost 

When  commodities  for  home  consumption  must  be 
produced  within  a  country  under  conditions  of  sharply 
increasing  cost  and,  because  of  limited  resources,  under 
disadvantageous  conditions  at  the  margin  of  production, 
the  opportunity  to  import  these  commodities  from  abroad 
is,  perhaps,  particularly  to  be  desired.  The  policy  of 
protection  to  the  home  production  of  such  goods  causes, 
in  the  protectionist  country,  production  at  an  increas- 
ingly greater  cost  according  as  the  protection  succeeds 
in  its  object.     Thus,   Germany's  policy  of  protection 


PROTECTION  AND  NATIONAL  WEALTH       7.3 

to  agriculture,  favored  by  the  owners  of  agricultural 
land,  undoubtedly  means  the  production  of  food  at  a 
progressively  higher  cost  in  proportion  as  the  protection 
is  effective.  A  high  tariff  protective  to  English  agricult- 
ure would  probably  raise  the  cost  of  food  so  high  as  to 
starve  to  death  millions  of  the  English  people.  An  anal- 
ogous consequence  follows  from  protection  to  manu- 
factures when  the  tariff  wall  safeguards  the  more  in- 
efficient plants  against  loss  from  foreign  competition, 
compelling  consumers  to  pay  prices  for  the  goods  desired, 
which  will  remunerate  the  inefficient  as  well  as  the  effi- 
cient home  producers.  Protection,  then,  forces  con- 
sumers to  get  many  of  the  goods  they  require,  at  greater 
cost,  either  because  the  production  cost  at  home  is 
uniformly  greater,  or  because  protection  compels  the 
use  of  the  poorer  soils,  the  poorer  mines,  the  poorer  sites, 
or  because  it  compels  the  giving  of  patronage  to  estab- 
lishments which  are  relatively  inefficient. 

But  may  it  not  be  desirable,  in  case  a  country  has  a 
large  export  trade  in  goods  produced  under  conditions 
of  increasing  cost,  e.g.  wheat,  to  establish  manufactures 
by  protection  in  order  to  draw  capital  and  labor  away 
from  the  poorer  or  marginal  lands  ?  Even  here  the  pro- 
tectionist policy  involves  a  loss,  though  perhaps  not  so 
great  a  loss.  It  is  only  if  and  because  even  the  poorest 
lands  in  use,  following  the  terms  of  our  illustration, 
yield  20  bushels  or  $20  a  week  in  Canada  compared  with 
a  possible  14  yards  or  $14  in  the  unprotected  linen  in- 
dustry, that  protection  is  required  to  establish  the  latter.1 
If  it  were  more  profitable  than  agriculture,  even  than 
agriculture  on  the  poorer  lands,  it  would  be  established 
without  protection.    If  it  requires  protection,  it  is  a  less 

1  Cf.  what  is  said  regarding  protection  of  this  sort,  in  Ch.  V  (of  Part  II),  §  5. 


74     ECONOMIC  ADVANTAGES  OF  COMMERCE 

profitable  business  from  the  standpoint  of  the  whole 
Canadian  people,  than  agriculture  on  the  best  available 
land  and,  therefore,  than  agriculture  on  the  poorest 
land  actually  used. 

§6 

Effect  of  a  Country's  Protective  Tariff  System  on  the  Cost 
to  it  of  Unprotected  Goods  Got  from  Other  Countries 

A  protective  policy,  however,  may  conceivably  give 
to  the  nation  which  enforces  it,  indirect  advantages 
compensating  in  part  or  in  whole  for  the  losses  incurred. 
Though  the  conditions  under  which  such  advantages 
would  be  at  all  comparable  with  the  losses,  could  seldom 
if  ever  occur  in  practice,  it  is  perhaps  worth  while  to  show 
what  these  conditions  are.  If  Canada  levies  a  high 
tariff  on  linen  from  Ireland,  and,  as  a  result,  following  the 
flow  of  gold  to  Canada,  Canadian  prices  rise  and  Irish 
prices  fall,  then  other  goods,  e.g.  laces,  silks,  etc.,  may 
be  produced  in  Ireland  more  cheaply  than  before.  In 
practice,  the  effect  would  be  more  largely  a  rise  of  Cana- 
dian than  a  fall  of  Irish  prices ;  for  the  fall  of  prices  due 
to  outflow  of  gold  must  eventually  be  distributed  over 
many  countries  and  would  be  slight  in  each,  while  the 
rise  of  prices  would  be  felt  in  Canada  alone.  But,  at 
any  rate,  since  Canadians  receive  more  for  their  wheat, 
the  silk,  etc.,  from  Ireland  (or  other  countries)  can  be 
better  afforded  than  formerly.1  If,  therefore,  the  result 
of  protection  is  that  Canada  receives  more  for  her  ex- 
ports, and,  while  shutting  out  linen,  gets  certain  other 

1  This  point  is  stated  in  relation  to  the  protective  policy  by  Taussig,  Prin- 
ciples of  Economics,  New  York  (Macmillan),  ion,  Vol.  I,  p.  525.  The  prin- 
ciple is  exactly  the  same  as  was  shown  to  apply  to  import  revenue  duties  by  Mill, 
Principles  of  Political  Economy,  Book  V,  Ch.  IV,  §  6,  and  by  Bastable,  The 
Theory  of  International  Trade,  fourth  edition.  London  (Macmillan),  igo3,  p. 
118.     Cf.  also  supra,  Ch.  Ill  (of  Part  II),  §  3. 


PROTECTION  AND  NATIONAL  WEALTH       75 

foreign  goods  for  a  less  price  than  formerly,  so  getting, 
for  example,  more  silk  than  previously  for  a  given  amount 
of  wheat,  it  is  not  entirely  certain  that  Canada  has  lost 
greatly  by  her  tariff  policy. 

Needless  to  say,  this  is  not  an  argument  for  protection 
that  would  win  it  many  votes.  For  a  political  campaign 
speaker  to  tell  the  voters  of  Canada  that  a  proposed 
tariff  will  hinder  a  profitable  trade  and  prevent  their 
getting  linen  cheaply  from  Ireland,  but  that  in  conse- 
quence they  may  be  able  to  buy  silk  somewhat  more 
cheaply  than  before  in  terms  of  wheat,  would  not  be 
likely  to  arouse  any  great  enthusiasm.  A  more  prob- 
able result  would  be  a  demand  from  silk  manufacturers 
in  Canada,  or  from  would-be  silk  manufacturers,  that 
they  also  receive  protection.  The  rising  money  cost  of 
production  in  Canada,  and  the  tendency  to  falling  cost 
in  Ireland,  would  imperil  the  Canadians'  home  market. 
Especially  would  silk  manufacturers  in  Canada  be  in- 
jured, if  they  had  to  use  machinery  or  raw  material 
directly  raised  in  price  by  the  tariff  system.  But  if 
the  silk  manufacturing  and  other  lines  of  production 
should  also  be  protected,  Canada  would  no  longer  gain 
from  the  protection  of  linen  the  indirect  benefit  sug- 
gested. The  higher  money  incomes  received  in  Canada 
are  no  advantage  if  they  must  be  spent  in  Canada,  where 
prices,  counting  prices  of  protected  goods,  have  been 
raised  even  more  by  the  tariff,  than  have  money  incomes. 
A  consistently  protectionist  country  can  hope  to  realize 
this  indirect  gain  from  protection,  only  on  goods  not 
producible  at  home  and,  therefore,  not  protected.  And 
the  direct  loss  in  higher  prices  of  protected  goods  may  be 
very  great  indeed.    As  we  have  already  seen,1  many  kinds 

1  §  2  of  this  chapter  (IV  of  Part  II). 


76     ECONOMIC  ADVANTAGES  OF  COMMERCE 

of  woolen  goods  have  been  costing  Americans  some  60 
to  70  per  cent  more  because  of  the  tariff. 

In  the  actual  commercial  world,  Canada  is  the  less 
likely  to  realize  much,  at  Ireland's  expense  (or  at  the 
expense  of  other  countries),  through  this  indirect  action 
of  the  tariff,  because  Ireland  (or  any  other  country)  has 
the  alternative  of  trading  elsewhere,  and  is  not  obliged 
to  offer  reluctant  Canada  bargains,  in  order  to  force  a 
trade,  except  as  Canada  may  have  a  substantial  mo- 
nopoly of  the  production  of  certain  goods.1  Canadians 
can  get  little,  if  any,  more  for  wheat  or  other  exported 
goods  than  before,  else  Ireland  will  refuse  to  buy.  And 
rather  than  accept  a  low  price  for  silk  and  other  goods, 
Ireland  may  sell  them  elsewhere  than  in  Canada.  It  is 
the  more  unlikely,  therefore,  that  Canada  will  gain,  thus 
indirectly,  as  much  as  she  loses  directly,  through  the  tariff. 

In  so  far  as  a  protective  policy  results  in  a  larger  quan- 
tity of  money  and  higher  money  prices  in  the  protec- 
tionist country,  it  is  likely  to  lead  to  a  demand  for  a 
progressively  higher  and  higher  tariff.  Assume,  as 
before,  a  50  cents  duty  per  yard  levied  by  Canada  on 
linen.  This  at  first  makes  linen  cloth  from  Ireland 
$1.50,  while  Canadian  cloth  can  sell  for  Si. 43  and  still 
yield  as  large  a  money  return  as  the  production  of  Cana- 
dian wheat.  This  enables  a  Canadian  linen  manufac- 
turer to  undersell  his  rival  of  Ireland  by  7  cents  a  yard. 
But  the  flow  of  gold  into  Canada,  resulting  from  the 
tariff,  will  raise,  among  other  prices,  the  money  cost  of 

1  Even  without  a  monopoly,  if  Canada  supplied  so  much  of  the  wheat  used  in 
Ireland  and  other  countries  that  for  them  to  substitute  wheat  from  other  sources 
would  lower  the  margin  of  cultivation  and  raise  wheat  prices,  Canada  could  con- 
tinue to  sell  some  wheat  at  slightly  higher  prices  than  before  the  tariff  was  laid. 
There  would  remain,  however,  the  probably  much  more  important  effect  of  the 
tariff,  for  Canada,  in  the  direct  loss  caused. 


PROTECTION  AND  NATIONAL  WEALTH       77 

producing  linen.  In  Ireland,  on  the  contrary,  the  ten- 
dency will  be  towards  a  lower  cost.  Soon,  therefore,  the 
Canadian  manufacturer  may  find  that  $1.43  is  not  a 
high  enough  price,  while  the  linen  manufacturer  of  Ireland, 
even  with  the  tax,  may  sell  for  less  than  $1.50.  Unless 
the  tariff  is  further  increased,  some  linen  will  soon  be 
secured  from  Ireland ;  there  will  no  longer  be  a  net  flow 
of  gold  into  Canada ;  and  Canadian  prices  will  no  longer 
rise  as  compared  with  Irish  prices.  Or,  as  we  have  seen, 
the  same  result  is  reached  by  Canadian  purchase  of  other 
Irish  goods.  Suppose,  however,  that  the  Canadian  tariff 
is  progressively  raised  so  as  to  maintain  the  7  cent  mar- 
gin, and  is  raised  on  other  Irish  goods  as  well,  and  suppose 
that  Ireland's  demand  for  Canadian  goods  is  not  checked 
until  money  in  Canada  is  -90-  of  its  former  amount  and 
in  Ireland  slightly  less  than  before.  Then,  assuming 
conditions  of  approximately  constant  cost,  Canadian 
wheat  will  sell  for  about  $1.10  a  bushel  and  Canadian 
linen  for  $1.57,  while  linen  made  in  Ireland  will  sell, 
not  counting  the  tariff,  for  slightly  less  than  $1  (not 
much  less,  since  any  considerable  fall  of  prices  in  Ireland 
would  cause  an  inflow  of  specie  from  Germany,  France, 
and  elsewhere,  so  distributing  over  many  countries  the 
effect  of  the  outflow  of  money  to  Canada).  To  give 
Canadian  producers  a  7  cents  margin,  the  tariff  will  now 
have  to  be  so  high  that  linen  made  in  Ireland  can  sell, 
in  Canada,  for  not  less  than  $1.64.  Since  this  linen 
sells,  without  the  tariff,  for  $1  or  less,  the  tariff  will  have 
to  be  $0.64  a  yard  1  instead  of  the  original  $0.50.  Even  a 
tariff  to  "equalize  the  cost  of  production"  would  need, 
after  this  change  in  relative  amounts  of  money,  to  be 
$0.57  instead  of  $0.43. 

1  We  are  here  neglecting  cost  of  transportation. 


78     ECONOMIC  ADVANTAGES  OF  COMMERCE 

But  it  must  not  be  supposed  that  continuous  extension 
and  increase  of  its  tariff  wall  can  raise  prices  in  a  country 
without  limit.  Even  if,  as  prices  in  Canada  rise  and  in 
Ireland,  or  elsewhere,  fall,  protection  is  given  to  each 
article  subject  to  foreign  competition,  which  can  be  made 
in  Canada,  and  even  if  this  protection  is  progressively 
raised  so  as  to  prevent  any  purchase  abroad  by  Cana- 
dians as  their  money  incomes  increase,  —  in  short,  even 
if  all  importation  of  goods  is  effectively  prohibited,  the 
rise  of  prices  in  Canada  will  nevertheless  eventually 
reach  a  limit.  For,  sooner  or  later,  Canadian  prices  will 
get  so  high  that  no  goods  whatever  will  be  purchased  in 
Canada  by  people  in  foreign  countries. 

All  these  conclusions  are  the  same,  except  as  to  nominal 
prices,  if  we  suppose  Canada's  currency  system  unrelated 
to  those  of  other  countries.  A  high  tariff  would  not 
then  raise  Canadian  money  prices,  but  it  would  change 
the  relative  value  of  Canadian  and  other  monetary  stand- 
ards so  as  to  make  purchase  of  Canadian  goods  more 
expensive  to  other  countries  in  terms  of  their  own  money. 
This  fact  has  been  frequently  pointed  out  in  preceding 
pages.  Here  it  is  to  be  emphasized  that  it  means  cheaper 
purchase  of  foreign  goods  in  terms  of  Canadian  goods. 
A  smaller  amount  of  Canadian  money  than  before  will 
buy  drafts  on  foreign  countries  for  more  foreign  money 
and,  therefore,  goods  than  before,  or  will  buy  the  gold 
equivalent  of  more  foreign  money  and  goods  than  before. 
Hence,  Canadians  are  tempted,  unless  prevented  by  a 
tariff,  to  buy  foreign  goods  which  they  did  not  previously 
buy  and  even,  unless  the  tariff  protection  is  increased, 
to  buy  goods  on  which  the  protection  seemed,  at  first, 
adequate  (though  not  excessive). 


PROTECTION  AND  NATIONAL  WEALTH       79 

§7 

A  Tariff  "Equal  to  the  Difference  in  Cost  oj  Production 
at  Home  and  Abroad,  together  with  a  Reasonable  Profit" 

In  view  of  these  facts,  together  with  the  fact  that  the 
same  kinds  of  goods  are  produced  simultaneously  at 
different  costs,  the  proposition,  prominently  put  forth 
in  recent  politics,  to  establish  a  tariff  which  shall  "equal 
the  difference  in  the  cost  of  production  at  home  and 
abroad,  together  with  a  reasonable  profit,"  !  is  chimeri- 
cal. There  is  no  fixed  difference,  independent  of  the  tariff, 
in  the  home  and  foreign  costs  of  production.  For  the 
difference  in  these  costs  is  dependent,  to  some  degree, 
on  the  relative  levels  of  prices  at  home  and  abroad, 
which  are  affected  by  the  flow  of  gold,  which  is,  in  turn, 
at  least  in  some  degree  affected  by  the  tariff.  The  tariff 
itself,  that  is,  helps  to  cause  the  very  difference  in  cost 
of  production  which  is  set  forth  as  a  justification  for  it. 
As  we  have  seen  in  our  illustration,  a  tax  of  43  to  50  cents 
per  yard  may  be,  at  the  start,  the  amount  necessary  to 
equalize  cost  of  production  in  the  protectionist  and  other 
countries,  and  yield  a  "reasonable"  profit;  yet  later,  if 
a  protective  tariff  policy  has  been  followed,  a  higher  tax 
than  43  cents  may  seem  equally  necessary  to  equalize 
conditions,  and  this  just  because  the  tariff  itself  has 
widened  the  cost  difference.  In  addition,  the  cost  of 
production  may  be  directly  increased  by  tariff  duties  on 
the  machinery  and  raw  materials  of  industry. 

Again,  "cost  of  production,"  if  not  further  denned, 
may  be  taken  to  mean  marginal  cost,  average  cost,  or 
cost  under  the  most  favorable  circumstances.     Is  a  tariff 

1  Republican  party  platform  of  1908,  Republican  Campaign  Text-Book,  1008, 
p.  462. 


80     ECONOMIC  ADVANTAGES  OF  COMMERCE 

which  equals  the  difference  in  cost  of  production  at  home 
and  abroad,  to  be  high  enough  adequately  to  protect 
the  marginal  producer,  or  the  average  producer,  or  only 
the  producer  best  situated?  In  manufacturing,  is  it 
to  protect  the  struggling  factory  hardly  able  to  maintain 
itself,  or  only  the  most  efficient  ?  If  protection  is  to  be 
given  to  the  producer  under  greatest  difficulties  and  to 
the  most  inefficient  producer,  the  burden  on  consumers 
may  be  very  great.  Furthermore,  inefficiency  is  in  some 
degree  encouraged,  instead  of  being  weeded  out.  The 
recent  Tariff  Board  found  in  the  cotton  manufacturing 
industry  of  the  United  States  not  only  modern  estab- 
lishments, but  also  some  of  low  efficiency  and  considerable 
antiquity.1  Some  6o-year  old  spinning  and  weaving 
machinery  was  still  in  use.  A  system  which  protects 
producers  the  more  highly  the  less  efficient  they  are, 
though  promulgated  as  a  "scientific"  solution  of  the 
tariff  problem,  would  seem,  in  view  of  these  considera- 
tions, very  far  from  being  such  a  solution.  If,  on  the 
other  hand,  the  protection  is  intended  only  to  equalize 
conditions  for  the  average  or  best  producers,  as  opposed 
to  foreign  competitors,  there  is  still  a  loss  to  consumers, 
and  there  is  also  the  objection,  from  the  protectionist 
point  of  view,  that  such  a  policy  would  leave  without 
adequate  protection  the  very  producers  most  needing 
help. 

§8 

Relative  Advantages  in  the  World's  Commerce  of  Countries 
having  High  and  Countries  having  Low  or  No  Tariffs 

Before  closing  our  discussion  of  protective  tariffs  in 
relation  to  national  prosperity,  there  is  one  general  truth 

1  Report  of  the  Tariff  Board  on  Schedule  I  of  the  Tariff  Law,  Vol.  2.  p.  416. 


PROTECTION  AND  NATIONAL  WEALTH       81 

to  which  we  may  properly  give  special  emphasis.  This 
truth  is  that,  among  a  number  of  trading  countries,  those 
with  low  or  with  no  tariff  restrictions  have  the  least  to 
lose.1  If,  for  example,  Great  Britain  alone  adheres  to 
the  principles  of  free  trade,  while  all  other  nations  main- 
tain high  import  duties  (or  high  export  duties,  or  both), 
then  Great  Britain's  position  in  trade  is  relatively  the 
best.  In  the  first  place,  purchasers  in  all  other  coun- 
tries will  buy  of  Great  Britain  rather  than  of  countries 
where  the  large  quantity  of  money  due  to  protection  (or 
where  high  export  duties,  if  such  were  common)  makes 
prices  of  goods  exported  by  them  high ;  and  this  very 
turning  of  the  demand  to  Great  Britain  will  enable 
British  producers  to  get,  for  what  goods  they  are  able, 
despite  foreign  protective  tariffs,  to  export,  higher  prices 
than  if  their  rivals  in  selling  each  special  kind  of  goods 
in  a  given  market,  were  similarly  untrammelled.  In 
the  second  place,  sellers  of  goods  produced  in  all  other 
countries,  being  unable  to  sell  so  easily  and  profitably 
to  countries  maintaining  protective  tariffs  against  them 
(or  to  countries,  if  there  were  any  such,  whose  export 
tariffs  make  their  home  prices  low),  will  be  the  more 
anxious  to  sell  all  they  can  in  Great  Britain ;  and  they 
will  make  even  lower  prices  in  selling  to  Great  Britain 
than  otherwise  they  would,  because  it  is  so  difficult  to 
secure  a  market  and  to  sell  at  a  profit,  anywhere  else. 
Protectionist  writers  have  sometimes  hinted  that  free 
trade,  or  tariff  for  revenue  only,  might  be  very  good  if 
all  nations  practised  it,  but  that  so  long  as  other  coun- 
tries practise  protection,  we  must  do  so  in  self-defence. 
The  truth  is  that  the  best  possible  way  for  a  nation  to 
adapt  itself  to  the  conditions  caused  by  the  bad  policy 

1  Cf.  Bastable,  The  Theory  of  International  Trade,  p.  122. 
past  n  —  G 


82     ECONOMIC  ADVANTAGES  OF  COMMERCE 

(e.g.  protective  tariffs)  of  the  others,  is  to  avoid  imitating 
that  bad  policy.  Then  it  has  an  advantage  over  these 
others  and  gains  trade  and  profit  which  they  cannot.1 

It  does  not  follow  that  Great  Britain  is  better  off  be- 
cause other  nations  have  high  duties.  So  far  as  other 
countries  become  self-sufficient  by  means  of  their  tariffs, 
Great  Britain  also  may  be  forced  to  be  more  self-sufficient 
than  would  otherwise  be  necessary.  But  so  far  as  some 
trade  still  persists,  despite  these  interferences,  Great 
Britain  has  an  advantage  in  getting  it  and  in  gaining 
from  it,  over  all  the  others.  Each  country's  tariff  lessens 
Great  Britain's  trade  with  that  country  and  so  tends  to 
decrease  the  wealth  of  both  Great  Britain  and  the  country 
levying  the  tariff.  But  each  country's  tariff  hurts  that 
country  as  a  competitor  of  Great  Britain  in  trade  with 
third  and  fourth  countries,  and  so  gives  Great  Britain 
an  advantage  over  it. 

Largely,  we  may  reasonably  suppose,  through  the 
operation  of  these  principles,  the  foreign  commerce  of 
the  United  Kingdom  long  since  reached  a  volume  which 
that  of  none  of  her  protectionist  rivals  has  yet  been  able 
to  attain.  Not  only  do  the  people  of  the  British  Isles 
trade  extensively  with  the  English-speaking  peoples  of 
their  own  colonies  and  with  the  United  States,  but  their 
commerce  is  the  greatest  with,  for  example,  most  of  the 
South  American  republics,2  as  well  as  with  many  other 
countries.  Their  ships  plough  the  remotest  seas  and  carry 
the  products  of  English  mines  and  factories  to  parts  of 
the  earth  almost  unknown  to  American  exporters.  Like- 
wise, from  all  parts  of  the  world  come  the  raw  materials, 

1  Cf.  Sumner,  Protectionism,  New  York  (Holt),  1885,  pp.  138,  139. 

2  See  comparative  statistics  in  any  of  the  recent  annual  reports  on  Commercial 
Relations  0/  the  United  States. 


PROTECTION  AND  NATIONAL  WEALTH       83 

the  food  supplies  and  other  goods,  which  the  British 
people  require  and  which  they  can  buy  more  cheaply 
abroad  than  they  can  produce  at  home.  Raw  cotton 
they  get  from  the  United  States,  from  Egypt,  from 
India,  to  be  reshipped  to  South  America  and  elsewhere 
as  cotton  fabrics,  or  to  be  made  up  into  wearing  ap- 
parel for  themselves.  Wheat  they  secure  from  the 
United  States,  Canada,  Argentina,  and  other  countries, 
and  they  secure  it,  we  must  conclude,  all  the  more 
cheaply  because  some  of  the  European  nations  restrict 
its  importation  by  means  of  protective  duties.  Wool  is 
available  particularly  in  South  America  and  in  Australia. 
In  short,  the  whole  world  is  a  British  market  so  far  as 
the  British  people  can  make  it  so,  and  from  countries 
near  and  far  they  draw  the  riches  which  other  nations, 
by  foolish  tariff  restrictions,  shut  away. 

§9 

Summary 

The  general  conclusion  of  this  chapter  is  that  a  pro- 
tective tariff  reduces,  and  may  reduce  considerably, 
the  total  wealth  of  the  country  which  adopts  it.  By  as 
much  as  it  hinders  imports,  by  so  much  it  must,  in  the 
long  run,  interfere  with  the  development  of  an  export 
trade.  It  diverts  the  productive  force  of  a  country  from 
lines  in  which  it  is  relatively  effective  to  lines  in  which  its 
effectiveness  is  less.  Even  if  those  who  are  protected 
gain  some  benefit  from  the  policy,  they  gain  less  than 
others  in  the  country  lose.  Protection  tends  to  raise  all 
money  prices,  including  money  incomes,  in  the  protected 
country.  But  there  is  a  special  rise  of  price  of  protected 
goods,   not  balanced  by  any   rise  of  money   incomes. 


84     ECONOMIC  ADVANTAGES  OF  COMMERCE 

Therefore,  prices  of  goods  rise,  on  the  average,  more  than 
money  incomes,  and  the  general  prosperity  is  reduced. 
It  is  conceivable,  but  improbable,  that  protection  of 
some  industries  may  result  in  larger  establishments 
within  the  protectionist  country  and  a  gain  in  efficiency 
enough  to  make  home  production  as  cheap  as  foreign. 
When  an  industry  of  increasing  expense  (diminishing 
returns)  is  protected,  the  injurious  effects  on  national 
prosperity  are  the  greater,  the  more  the  tariff  extends 
the  industry.  Protection  may  give  to  a  country  indirect 
advantages  in  the  form  of  better  rates  of  interchange 
on  other,  unprotected  goods,  but  this  gain  is  not  likely 
to  be  great,  since  other  countries  have  the  option  of 
trading  elsewhere  than  with  the  protectionist  country. 
If  such  a  gain  were  likely  to  be  realized,  there  would 
probably  be  a  demand,  in  the  protectionist  country, 
for  the  taxation  of  imports  of  these  other  goods  in  so 
far  as  they  could  be  produced  at  home,  and  so  a  partial 
prevention  of  the  gain. 

If  protection  is  applied  moderately  but  upon  many 
goods,  so  that  the  scale  of  prices  in  the  protectionist 
country  rises  compared  with  others,  even  some  of  the 
protected  goods  may  come  to  be  imported  to  some  extent 
from  countries  whose  prices  have  not  thus  been  artifi- 
cially raised.  If  so,  there  is  likely  to  be  a  demand  for 
further  protection.  The  proposition  to  levy  a  tariff 
which  shall  be  equal  to  the  difference  in  cost  of  produc- 
tion in  the  protected  country  and  abroad,  overlooks  the 
fact  that  this  difference  in  cost  is,  to  some  extent,  a 
consequence  of  high  protection.  It  overlooks,  also,  the 
fact  that  cost  is  not  the  same  in  all  establishments  or  on  all 
sites,  within  a  single  country. 

Despite  the  frequent  claim  of  some  protectionists  that 


PROTECTION  AND  NATIONAL  WEALTH       85 

any  one  country  must  adopt  a  protective  tariff  system 
because  others  do,  the  truth  is  that  a  country  which, 
among  others  having  high  import  duties  (or  export  duties 
or  both),  maintains  free  trade  or  only  low  tariffs,  has  an 
advantage,  because  of  this  policy,  over  all  the  others. 


CHAPTER  V 

The  Effects  of  Protection  on  the  Distribution  of 
National  Wealth  among  Economic  Classes  and 
Territorial  Sections 

§i 

Effect  of  Protection  on  the  Rate  of  Interest  and  Therefore 

on  Wages 

In  discussing  the  effects  of  a  protective  tariff  on  the  dis- 
tribution of  wealth  and  income  among  economic  classes, 
it  is  important  that  we  have  in  mind  some  idea  of  the 
laws  according  to  which  wealth  and  income  are  divided. 
The  benefits,  or  the  wealth  and  income,  resulting  from 
production  are  said  to  be  divided  among  capitalists, 
laborers,  and  land  owners.  Capitalists  receive  interest ; 
laborers  receive  wages ;  land  owners  receive  rent. 

Interest  arises,  in  large  part,  from  the  surplus  pro- 
ductivity of  indirect  or  roundabout  production,  over 
direct.1  Men  can  produce  consumers'  wealth  and  in- 
come by  applying  labor  with  the  aid  of  existing  machin- 
ery, or  they  can  devote  time  to  increasing  the  amount 
of  machinery  in  order  to  get,  later,  larger  results.  The 
second   method   is   more   indirect   or   roundabout.     It 

1  It  is  not  claimed  that  the  theory  of  interest  as  here  briefly  stated  is  com- 
plete, or  anything  but  a  working  theory  sufficient,  perhaps,  for  the  requirements 
of  this  chapter.  The  subject  of  interest  is  so  interwoven  with  other  economics, 
that  it  cannot  be  satisfactorily  treated  in  a  few  paragraphs.  The  critical  reader 
is  referred  to  the  writer's  article  in  the  Quarterly  Journal  of  Economics,  August, 
igi3,  entitled  "The  Marginal  Productivity  versus  the  Impatience  Theory  of 
Interest,"  and  to  a  later  article  in  The  American  Economic  Review,  June,  1014, 
on  "The  Discount  versus  the  Cost  of  Production  Theory  of  Capital  Valuation." 

86 


PROTECTION  AND  DISTRIBUTION  87 

yields,  in  general,1  a  surplus  product  over  what  can  be 
secured  by  the  more  direct  method.  But  roundabout 
production,  i.e.  production  by  first  making  tools,  ma- 
chinery, etc.,  yields  a  smaller  surplus  the  further  it  is  ex- 
tended. The  more  tools,  machinery,  and  other  capital 
equipment  we  have  (after  a  certain  point  is  reached),  the 
less  desirable  is  it  further  to  increase  this  equipment. 
The  gain  or  surplus  from  so  doing  becomes  smaller  and 
smaller,  yet  for  a  long  time,  perhaps  indefinitely,  remains 
a  gain. 

But  thus  to  extend  the  roundaboutness  of  production 
requires  a  supply  of  goods  for  the  present  maintenance 
of  those  occupied  in  constructing  the  necessary  capital, 
since  they,  being  engaged  in  roundabout  production, 
cannot  secure  this  present  maintenance  from  their 
present  labor.  Possession  of  goods  which  may  serve  as 
means  of  maintenance  for  laborers  during  the  roundabout 
production  process,  enables  production  to  be  carried  on 
thus  indirectly  with  the  consequent  larger  product. 
For  this  reason,  a  surplus  in  future  goods  will  be  paid 
for  a  given  amount  of  present  goods ;  $100  to-day  may 
buy  $105  next  year,  for  $100  to-day  makes  it  possible  to 
turn  away  from  production  for  immediate  needs  and  to 
produce,  by  the  usually  larger  yielding  indirect  method, 
for  the  future.  For  the  use  of  the  present  consumable 
goods  which  make  indirect  production  possible,  a  pre- 
mium will  be  paid  by  those  desiring  control  of  the 
present  goods ;  and  this  premium  will  depend  on  the 
gain  which  indirect  production  yields.  The  possessors 
of  command  over  present  goods,  on  the  other  hand,  will 
not  trade  them  for  future  goods  except  for  a  premium, 

1  Not  necessarily,  but  unless  the  indirect  process  is  expected  to  yield  more,  it 
will  not  be  adopted. 


88     ECONOMIC  ADVANTAGES  OF  COMMERCE 

because  these  present  goods  can  be  used  in  support  of 
themselves  and  those  they  hire  and  so  can  make  it  possible 
for  them  to  engage  in  roundabout  production  and  reap 
the  surplus.  To  dispose  of  their  command  over  present 
goods  is,  in  so  far,  to  give  up  this  possibility,  and  they 
will  not  give  it  up  without  compensation.  The  rate  of 
interest,  then,  is  determined,  on  both  the  supply  and 
demand  sides  of  the  market,  —  the  side  of  those  who  want 
and  that  of  those  who  have  command  over  present  goods, 
— by  the  rate  of  surplus  productivity1  of  roundabout  over 
more  direct  production. 

To  recapitulate,  the  more  largely  production  is  round- 
about or  capitalistic,  the  larger  is  the  total  amount  of 
wealth  and  income  yielded  ;  the  more  largely  production 
is  capitalistic,  the  less  additional  gain  is  realized  by  the 
further  extension  of  roundabout  production  ;  the  greater 
the  accumulations  of  society,  and  the  further  indirect 
production  is  extended,  the  lower  (other  things  equal) 
is  the  rate  of  interest.  Large  accumulations  and  great 
extension  of  roundabout  production  make  social  wealth 
greater,  the  rate  of  interest  lower,  the  rate  of  wages 
higher.  We  saw,  in  the  last  chapter,  that  a  protective 
tariff  tends  to  decrease  the  productive  efficiency  of  a 
country  which  applies  it.  Such  a  tariff  makes  more 
difficult  the  process  of  accumulation.  It  tends  somewhat 
to  lessen  the  degree  of  roundaboutness  in  production,  to 
lessen  the  extent  to  which  production  is  capitalistic. 
Protection,  therefore,  because  it  lessens  national  wealth 
through  turning  industry  into  less  profitable  channels, 
may  lessen  national  wealth  further  by  making  production 
less  capitalistic.  If  it  does  this,  it  will  tend  to  raise  the 
rate  of  interest,  though  not  necessarily  the  total  amounts 

1  At  the  margin  of  indirect  production. 


PROTECTION  AND  DISTRIBUTION  89 

received  as  interest  since  the  higher  rate  will  be  on  smaller 
capital ;  while  it  will  tend  to  reduce  wages  both  by  giving 
to  capitalists  a  larger  proportion  of  the  results  of  round- 
about production  and  by  making  production,  on  the 
whole,  less  roundabout  and,  therefore,  less  efficient. 
This  indirect  effect  which  a  protective  tariff  may  have  on 
wages,  through  its  effect  on  accumulation  and  the  rate 
of  interest,  is  without  doubt  very  much  less  important 
than  the  more  direct  effect  to  be  next  discussed,  but 
its  operation,  so  far  as  it  does  affect  wages,  is  unfavorable. 

§2 

Brief  Statement  of  Laws  of  Wages  and  Land  Rent 

The  general  level  of  wages  is  determined,  like  other 
prices,  by  supply  and  demand.  The  wages  which  will 
equalize  supply  of  and  demand  for  labor  will  be  higher 
or  lower  according  as  labor  is  more  or  less  productive. 
Should  the  productivity  of  labor  double,  wages  would 
double.  For  if  labor  would  produce  twice  as  much  as 
before  and  wages  did  not  rise  correspondingly,  the  profit 
to  be  realized  in  hiring  labor  would  be  very  great.  This 
would  increase  the  demand  for  labor  until,  if  wages  did 
not  rise,  demand  would  exceed  supply.  Hence,  wages 
must  rise  and  must  rise  in  proportion.  We  have  refer- 
ence here  to  real,  as  distinguished  from  money,  wages; 
that  is,  to  the  necessaries,  ccwnforts,  and  luxuries  which 
wage  earners  receive,  rather  than  to  the  mere  number  of 
dollars. 

If  all  land  were  equally  fertile  and  all  sites  equally 
good,  and  if  desired  land  and  space  were  unlimited,  wages 
would  equal  the  whole  product  of  labor  except  interest. 
Those  who  advanced  the  means  required  to  make  pro- 


oo      ECONOMIC  ADVANTAGES  OF  COMMERCE 

duction  more  roundabout,  would  enjoy  interest ;  beyond 
this,  labor  would  get  the  entire  product  of  industry. 
But  all  land  is  not  equally  fertile  ;  all  sites  are  not  equally 
satisfactory ;  land  and  space  are  not  unlimited ;  and 
there  is  to  be  reckoned  with,  the  great  law  of  diminish- 
ing returns.  Whether  in  agriculture,  manufacturing,  or 
other  work,  an  increase  of  labor  upon  any  given  space  or 
area  will  not,  beyond  a  certain  point,  result  in  a  pro- 
portionate increase  of  the  product.  Two  men,  on  a  ioo- 
acre  farm,  may  secure  twice  or  more  than  twice  as  great 
a  result  as  can  one.  But  it  is  pretty  certain  that  two 
hundred  men,  working  on  that  farm,  will  not  secure  ioo 
times  as  large  a  product  as  can  two  men.  So,  in  manu- 
facturing, a  point  of  maximum  economy  is  reached, 
beyond  which  it  does  not  pay  to  crowd  men  together  on  a 
limited  area  or  to  build  story  upon  story,  but  beyond 
which  larger  production  requires  more  land.  Since  all 
land  is  not  equally  good,  this  means  that  larger  production 
requires  the  use  of  less  productive  land  and  sites  than 
would  otherwise  have  to  be  used. 

To  illustrate  the  bearing  of  these  facts  upon  the  theory 
of  wages  and  rent,  let  us  consider  the  case  of  a  ioo-acre 
farm.  Upon  it,  two  men  might  be  able  to  produce  wheat 
at  the  rate  of  3120  bushels  a  year  or  an  average  of  60 
bushels  a  week,  three  men  an  average  of  85  bushels  a 
week,  four  men  105  bushels,  five  men  120  bushels.  Then 
the  third  man  adds  25  bushels  to  the  product  which  would 
result  from  two  men's  work ;  the  fourth  man  would  add 
20  bushels;  the  fifth,  15  bushels.  Suppose  that  wheat 
is  $1  a  bushel.  Then,  if  wages  are  not  more  than  $25 
a  week  but  are  enough  less  to  pay  interest  on  the  wages 
advanced,  the  owner  of  the  land  will  hire  three  men  to 
cultivate  it.     He  will  not  hire  a  fourth,  since  a  fourth  will 


PROTECTION  AND  DISTRIBUTION  91 

add  but  20  bushels,  worth  $20,  to  the  product.  If, 
however,  wages  are  slightly  less  than  $20  a  week,  he  will 
hire  four  men;  and  if  they  are  slightly  less  than  $15, 
he  will  employ  five.  The  higher  wages  are,  the  fewer 
men  he  will  employ.  The  lower  wages  are,  the  more  men 
he  will  employ.  This  is  true  of  all  employers.  Some 
land  is  so  poor  that  no  one  can  afford  to  work  it  or  hire 
others  to  work  it,  if  wages  are  high.  If  wages  are  low, 
this  land  can  be  worked  profitably.  In  general,  the 
lower  wages  are,  the  greater  is  the  demand  for  labor. 
More  men  are  desired  on  the  more  productive  sites  and 
men  are  desired  for  the  utilization  of  sites  that  otherwise 
would  stand  undeveloped.  At  any  level  of  wages, 
employers  will  hire  men  up  to  the  point  where  the  last 
man  hired  just  produces  his  wages  or  just  produces  his 
wages  plus  interest. 

To  the  extent  that  industry  is  carried  on  under  nearly 
constant  cost,  a  great  amount  of  labor  can  be  employed 
at  wages  almost  as  high  per  man  as  would  be  paid  to  a 
smaller  number  of  laborers.  Very  little  reduction  of 
wages  is  required  to  increase,  greatly,  the  demand  for 
labor,  since  many  employees  can  be  hired  before  the 
worth  of  the  last  man  (the  marginal  product  of  labor), 
becomes  less  than  his  wages.  If,  on  the  other  hand, 
industry  is  carried  on  under  conditions  of  sharply  in- 
creasing labor  cost  (diminishing  returns),  any  consider- 
able increase  in  the  demand  for  labor  (other  things  equal), 
will  not  take  place  except  at  greatly  reduced  wages.  If, 
therefore,  the  industry  of  a  country  is  forced  into  a  line 
of  sharply  increasing  labor  cost,  real  wages  must  become 
lower ;  though  it  is  likewise  true  that  if  industry  is  forced 
into  a  line  of  constant  labor  cost  into  which  it  would  not 
naturally  go,  real  wages  will  probably  become  lower.1 

1  See  §  s  of  this  chapter  (V  of  Part  II). 


92       ECONOMIC  ADVANTAGES  OF  COMMERCE 

Ignoring  interest,  the  law  of  which  we  have  already 
stated,  the  surplus  of  production  above  the  amounts  paid 
as  wages  constitutes  land  rent  and  goes  to  the  owners  of 
land.  In  our  illustration,  at  wages  of  $20  a  week  or 
slightly  less,  not  more  than  four  men  would  be  employed 
on  the  given  farm.  No  one  of  them  would  be  employed 
at  more  than  $20  wages,  because  no  one  of  the  four  adds 
more  than  20  bushels  or  $20  to  what  the  product  would 
be  without  him.  The  weekly  wages  of  all  four  will  not, 
therefore,  exceed  $80.  The  total  product,  however,  with 
four  men  working,  is  105  bushels  or  $105  worth.  This 
leaves  $25  a  week  as  land  rent  to  the  owner  of  the  farm. 
If  wages  were  lower,  not  only  would  more  men  be  em- 
ployed, but  rent  would  be  higher.  If  wages  were  higher, 
fewer  men  would  be  employed  and  rent  would  be  lower. 
Some  land  will  yield  higher  rent ;  some  is  so  poor  as  to 
yield  no  rent. 

When  protection  turns  the  industry  of  a  country  into 
a  line  which  it  otherwise  would  not  follow,  the  rents  of 
lands  or  sites  required  in  this  line  tend  to  rise,  and  the 
owners  of  these  lands  and  sites  become  more  prosperous. 
On  the  other  hand,  the  rents  of  lands  or  sites  which  were 
used  in  the  lines  from  which  industry  has  been  turned, 
tend  to  fall,  and  the  owners  of  these  lands  and  sites 
become  less  prosperous.  Our  task  is  to  inquire  what,  in 
general,  is  the  effect  of  protection  on  the  total  rent  pay- 
ments and  on  the  general  level  of  real  wages  in  the 
protectionist  country. 


PROTECTION  AND  DISTRIBUTION  93 

§3 

The  Effect  of  Protection  on  Wages  wfien  Protected  and  Un- 
protected Goods  are  Produced  in  the  Protectionist  Coun- 
try, under  Conditions  of  Substantially  Constant  Cost 

Let  us,  to  begin  with,  consider  the  effect  of  protection 
on  wages,  when  both  protected  and  unprotected  goods 
are  produced,  in  the  protectionist  country,  under  condi- 
tions of  substantially  constant  cost.  Under  these  condi- 
tions, a  tariff  will  not  greatly  affect  land  rent.  The  first 
effect  of  protection  is,  as  we  have  seen,1  to  raise  the  prices 
of  protected  goods  by  not  more  than  the  amount  of  the 
tariff,  without  affecting  money  wages.  The  secondary 
effect  of  protection,  resulting  from  the  inflow  of  money 
(so  far  as  protection  occasions  such  an  inflow) ,  is  to  raise 
prices  of  unprotected  goods  and  money  wages,  and  to 
further  raise  the  prices  of  protected  goods.  Canada's 
protective  tariff  on  linen  has,  as  its  first  effect,  a  43  cents 
or  a  43  per  cent  rise  in  price  per  yard,  wages  remaining  the 
same,  viz.  about  $20  a  week  (a  week's  labor  producing 
20  bushels  of  wheat  worth  $1  a  bushel).  The  second 
effect  may  be  to  raise  everything  10  per  cent.  If,  under 
conditions  of  constant  cost  in  all  lines,  there  is  such  a 
general  rise  of  prices  due  to  money  inflow,  we  must 
suppose  that,  until  this  rise  reaches  10  per  cent,  there  will 
be  some  Canadian  goods  still  sufficiently  in  demand  else- 
where to  maintain  the  inflow  of  gold,  though  wheat, 
because  of  competition  from  other  sources,  may  not  be 
such  a  good.  Assuming  such  an  average  secondary 
rise  of  10  per  cent,  and  that  all  goods  are  produced  under 
conditions  of  constant  cost,  this  rise  must  affect  any  one 
kind  of  goods,  e.g.  wheat.     Otherwise,  those  producing 

1  See  Ch.  IV  (of  Part  II),  §§  i  and  2. 


94     ECONOMIC  ADVANTAGES  OF  COMMERCE 

that  kind  of  goods  will  turn  to  some  other  line.  If  wheat 
cannot  be  exported  at  the  higher  price,  only  enough  will 
be  produced  for  home  consumption,  and  the  other  wheat 
producers  will  become  linen  producers,  etc.  Then  the 
total  increase  of  wheat  in  price  is  10  per  cent,  and  of 
money  wages  10  per  cent,  but  of  linen  57  per  cent  (43 
per  cent  and  10  per  cent  more  added  to  the  new  price 
of  $1.43  makes  $1.57).  Obviously,  the  average  wage 
earner's  condition  is  worse  because  of  the  tariff,  even 
though  his  money  wages  are  somewhat  higher  than 
otherwise  they  would  be.  If  the  protectionist  country 
has  an  inconvertible  money  system  unrelated  to  foreign 
systems,  money  wages  and  unprotected  goods  will  remain 
the  same  in  price  as  before,  while  protected  goods  rise 
in  price.  Wage  earners  will  be  worse  off.  With  a  com- 
mon money  standard,  gold,  for  the  countries  trading, 
prices  in  the  protectionist  country,  even  of  unprotected 
goods,  rise,  and  wages  rise  in  the  same  proportion ;  but 
since  wages  rise  in  no  greater  proportion,  and  since 
protected  goods  do  rise  in  price  by  a  greater  proportion, 
real  wages  are  lower.1 

Our  conclusion  as  to  money  wages  is  only  that  a  high 
tariff  will  tend  to  make  them  higher  in  a  given  country 

1  A  restrictive  duty  on  the  export  of  wheat  would  cause  an  outflow  of  gold 
and  a  fall  in  the  general  level  of  prices  but  would  likewise  reduce  real  wages. 
The  decreased  market  for  wheat  would  lower  its  price  in  Canada  and  would 
lower  in  the  same  degree  (assuming  it  to  be  produced  under  conditions  of  con- 
stant cost)  the  money  wages  of  producers.  But  the  price  of  linen,  into  the  pro- 
duction of  which  Canadian  labor  might  in  considerable  degree  be  eventually 
forced,  could  not,  since  Canada  is  at  a  relative  disadvantage  in  its  production, 
fall,  to  the  same  extent,  below  the  price  at  which  it  was  previously  imported. 
At  that  price,  outflow  of  money  for  linen  would  cease.  Under  the  conditions 
of  production  assumed,  Canadians  could  better  afford  to  produce  wheat  even 
for  but  70  cents  a  bushel  than  to  produce  linen  for  appreciably  less  than  $i  a 
yard.  Twenty  bushels  at  70  cents  a  bushel  or  14  yards  at  $1  a  yard  would  alike 
yield  but  $10  a  week.  A  week's  wages  would  buy  as  much  wheat  as  before  but 
less  linen.     Hence,  real  wages  would  be  lower  because  of  such  a  tax. 


PROTECTION  AND  DISTRIBUTION  95 

than  they  would  be  in  that  same  country  in  the  absence 
of  the  tariff.  It  does  not  follow  that  money  wages  will 
be,  necessarily,  higher  in  a  protectionist  country  than  in 
a  free  trade  country.  In  a  prosperous  country,  money 
wages  as  well  as  real  wages  will  be,  other  things  equal, 
higher  than  in  a  country  not  prosperous.  In  the  United 
States,  for  example,  average  money  wages,  as  well  as 
average  real  wages,  are  higher  than  in  Europe.  This  is 
due  to  the  fact  that  in  many  lines  we  have  great  natural 
resources  without  having  too  dense  a  population.  We 
are  productive  in  many  lines  of  agriculture,  particularly 
perhaps  in  the  raising  of  wheat,  corn,  and  cotton.  We  are 
also  productive  in  certain  lines  of  manufacture,  having, 
for  example,  in  Pennsylvania  and  in  Alabama,  great 
advantages  for  the  manufacture  of  steel  and  steel  prod- 
ucts. In  these  various  lines  of  effort,  the  United  States 
is  so  productive  that,  even  with  reasonably  low  prices 
received  for  the  goods,  the  daily  wages  of  labor  in  these 
lines  are  high  compared  with  European  standards.  Since 
we  are,  in  these  lines  of  activity,  so  productive,  those  in 
all  other  lines  of  industry  must  get  equally  high  wages  or 
they  will  go  into  these.  That  is,  assuming  open  compe- 
tition, the  national  prosperity  cannot  be  confined  to  any 
one  occupation.  Thus,  since  our  wheat  raisers  and  steel 
producers  are  prosperous,  our  bricklayers,  carpenters, 
plumbers,  etc.,  need  to  be  well  rewarded  to  keep  them  in 
their  work.  Therefore,  the  prices  of  houses  and  of  other 
goods  which  cannot  be  imported,  and  in  producing  which 
this  country  does  not  have  the  superiority  that  it  has  in 
cotton,  wheat,  steel,  etc.,  will  be  high. 

From  these  considerations  it  would  appear  that  if 
wheat,  cotton,  steel,  and  some  other  lines  of  industry  are, 
in  the  United  States,  exceptionally  productive,  it  is  the 


96     ECONOMIC  ADVANTAGES  OF  COMMERCE 

most  economical  policy  for  us  to  import  other  products 
which  we  can  obtain  more  cheaply  abroad,  rather  than  to 
employ  our  own  high-priced  labor  in  relatively  unpro- 
ductive effort.  The  prosperous  country  ought  to  have 
higher  money  wages,  but  not  higher  prices  of  importable 
commodities  except  as  transportation  and  distributing 
costs  make  them  higher.  The  fact  that  we  have  great 
natural  resources  in  comparison  to  population,  and  that 
our  labor  is  in  some  lines  very  productive,  should  make 
us  immensely  more  prosperous  than  the  older  and  more 
crowded  countries  whose  resources  in  comparison  with 
their  populations  are  much  less  than  ours,  and  should 
make  real  wages  markedly  higher  here.  For  decades 
we  have  had  a  tariff  policy  admirably  adapted  to  raise 
the  cost  of  living  and  decrease  our  prosperity.  If  we 
have  been  prosperous  and  if  our  wages  have  been  high, 
it  has  been  in  spite  of  and  not  because  of  the  tariff. 
Comparing  two  European  countries,  England  and  Ger- 
many, the  former  the  stock  example  of  free  trade,  the 
latter  a  protectionist  country,  we  find  prices  some  18 
per  cent  higher  in  Germany  and  money  wages  lower.1 

1  See  "A  Comparative  Study  of  Railway  Wages  and  the  Cost  of  Living  in 
the  United  States,  the  United  Kingdom,  and  the  Principal  Countries  of  Con- 
tinental Europe,"  Bureau  of  Railway  Economics,  Bulletin  No.  34,  Washington, 
D.C.,  1912,  pp.  11,  35,  and  67.  In  the  same  Bulletin  (p.  11),  it  is  shown  that 
railway  wages  in  the  United  States  in  1 900-1910  averaged  S2.23  per  day  as  com- 
pared with  wages  in  England  and  Wales  for  1910  of  $1,067.  It  is  also  shown 
(p.  67)  that  prices  in  the  United  States  for  goods  in  workmen's  budgets  in  1909 
were  38  per  cent  higher  than  in  England  and  Wales.  It  appears,  therefore, 
that  despite  the  tariff,  naturally  favoring  conditions  have  kept  American  real 
wages  somewhat  higher  than  English  wages,  but  not  so  much  higher  as  a  com- 
parison of  money  wages  alone  might  lead  us  to  suppose.  Comparative  railway 
wages  are  probably  as  good  an  index  of  comparative  wages  in  general  as  is 
available. 


PROTECTION  AND  DIbTRIBUTION  97 

§4 

The  Effect  of  Protection  on  Wages  and  Rent  when  the 
Protected  Goods  are  Produced  under  Conditions  of 
Sharply  Increasing  Cost 

Still  assuming  the  unprotected  product,  wheat,  to  be 
produced  in  Canada  at  so  nearly  constant  cost  that  the 
withdrawal  of  some  labor  into  linen  making  will  not 
appreciably  lower  the  price  of  wheat,  let  us  suppose  the 
conditions  to  be  such  that  linen  manufacturing,  in 
Canada,  can  be  extended  only  at  increasing  cost.  We 
may  suppose,  for  instance,  that  there  are  a  very  few  sites 
favorably  located  near  sources  of  cheap  power  and  on 
transportation  lines,  and  that  upon  these  sites  linen  can 
be  produced,  even  in  Canada,  for  $1  a  yard,  or,  at  worst, 
for  less  than  $1.43.  But  most  of  the  desired  supply,  in 
the  absence  of  protection,  is  obtained  from  Ireland. 
Protection,  by  shutting  out  the  supply  from  abroad, 
encourages  the  use  of  the  poorer  sites  in  Canada,  since 
the  better  sites,  by  our  hypothesis,  cannot  produce 
enough  to  satisfy  the  demand.  To  remunerate  pro- 
ducers on  the  poorer  sites,  the  price  must  be  higher,  say 
$1.43  a  yard.  If  it  is  not,  producers  on  the  poorer  sites 
cannot  pay  the  prevailing  rate  of  wages.  If  it  is,  pro- 
ducers on  the  better  sites  have  a  surplus  or  rent,  since 
production  costs  them,  in  wages,  less  money  per  yard 
than  it  costs  producers  on  the  poorer  sites. 

Otherwise  expressing  the  matter,  we  may  say  that  a 
week's  labor  in  Canada  will  produce  20  yards  of  linen 
on  the  better  sites,  but  only  14  on  the  poorer  sites.  If 
the  poorer  sites  are  to  be  used,  wages  cannot  be  more  than 
14  yards  a  week  or  the  money  equivalent  of  14  yards. 
But  the  owners  of  the  better  sites  have  a  surplus,  after 

PART  II  —  H 


98     ECONOMIC  ADVANTAGES  OF  COMMERCE 

paying  these  wages,  of  6  yards  or  the  money  equivalent 
of  6  yards. 

So  far,  then,  as  Canada  supplies  itself,  after  the  protec- 
tive policy  is  adopted,  with  Canadian  linen  manufactured 
on  the  most  favorable  sites,  there  is  no  national  loss. 
Wages,  that  is,  real  wages,  are  lower.  The  rents  of  the 
favorable  factory  sites  are  higher.  Money  wages  are  not 
lower,  but  linen  is  higher  in  price,  and  the  rise  goes  to 
increase  the  incomes  of  land  owners.  So  far  as  Canada 
supplies  itself  with  linen  from  the  less  advantageously 
located  factories,  the  higher  price  means  a  loss  to  wage 
earners  with  no  corresponding  gain  to  the  owners  of  land. 
Under  the  conditions  of  production  here  assumed  (pro- 
duction of  linen  under  conditions  of  increasing  cost  and 
of  wheat  at  nearly  constant  cost),  the  protective  tariff 
would  indeed  decrease  the  net  wealth  and  income  of  the 
protectionist  country,  but  the  land  owning  class  would 
gain.1  Rents  of  lands  required  for  the  protected  industry 
(assumed  to  be  of  increasing  cost)  would  rise  to  a  greater 
degree  than  rents  of  lands  required  for  unprotected  in- 
dustries (assumed  to  be,  within  limits,  of  nearly  constant 
cost)  would  fall.  The  total  national  loss  in  yearly  income 
would  therefore  be  less  than  the  loss  of  the  wage  earning 
class  alone.  Part  of  the  loss  of  the  wage  earning  class 
would  be  absolute  national  loss ;  the  rest  would  be  loss 
balanced  by  land  owners'  gain. 

No  essential  corrections  need  to  be  made  in  these  con- 
clusions because  of  the  inflow  of  money  resulting  from 

1  A  similar  result,  except  that  there  would  be  an  outflow  of  money  and  a  fall 
of  money  prices,  would  follow,  under  our  assumptions,  from  a  restrictive  export 
duty  on  wheat.  Such  a  duty  would  prevent  production  of  wheat  for  export, 
drive  some  Canadian  labor  into  other  lines,  e.g.  the  manufacture  of  linen,  even 
though  for  small  returns,  reduce  real  wages,  and  raise  the  rents  of  land  and  sites 
required  in  the  newly  expanded  lines  of  industry. 


PROTECTION  AND  DISTRIBUTION  99 

protection.  Under  the  assumed  conditions,  the  second- 
ary rise  of  prices  so  caused  would  affect  rents,  wages,  and 
nearly  all  prices,  alike. 

Duties  of  the  special  kind  here  criticised,  we  have  had 
in  plenty  in  our  own  various  protective  tariff  acts.  Our 
protective  tax  on  coal,  compelling  resort  to  the  poorest 
native  mines  in  preference  to  securing  some  coal  from 
abroad,  has  doubtless  tended  to  increase  the  value  of 
native  mines  and  the  profits  of  mine  owners,  but  has  done 
this  only  at  the  greater  expense  of  the  wage  earning  pub- 
lic. The  protection  accorded  to  raw  wool  by  the  much 
criticised  schedule  K  of  the  Payne-Aldrich  tariff  bill, 
certainly  tended  to  encourage  the  production  of  wool 
in  the  United  States  on  lands  which,  otherwise,  it  would 
not  have  paid  to  use  for  that  purpose.  The  owners  of 
lands  used  for  sheep  raising  were  doubtless  in  many  cases 
able  to  realize  larger  profits  or  higher  rents,  but  only  at 
the  greater  expense  of  others,  largely  the  wage  earners. 

In  estimating  the  relative  costs  of  production  of  raw 
wool  in  different  countries  and  in  different  parts  of  the 
United  States,  the  Tariff  Board  subtracted  the  receipts 
to  sheep  raisers  from  other  things  than  the  wool,  chiefly 
from  mutton.  There  was  left,  in  their  reckoning,  a  cost 
which  the  wool  must  cover.  This  surplus  cost  they  found 
to  be  nothing  in  New  Zealand  and  on  the  favorably  sit- 
uated runs  of  Australia,  a  very  few  cents  a  pound  for 
Australasia  in  general,  4  or  5  cents  a  pound  for  South 
America,  g\  cents  a  pound  for  the  United  States, 
n  cents  for  the  "fine"  and  "fine  medium"  wools  of  the 
American  west,  and  19  cents  for  the  fine  wools  of  Ohio 
and  the  contiguous  territory.1    The  effect  of  protection 

1  Report  of  the  Tariff  Board  on  Schedule  K  of  the  Tariff  Law,  1912,  Vol.  I, 
Part  I,  pp.  10,  11. 


ioo    ECONOMIC  ADVANTAGES  OF  COMMERCE 

(now,  fortunately,  removed  from  raw  wool)  has  been  to 
shut  out  very  largely  the  lower  priced  foreign  wool, 
to  compel  the  use  of  the  high-priced  American  wool,  to 
make  wool  production  profitable  on  lands  relatively 
unsuited  for  it,  to  make  the  rental  value  of  these  lands 
higher,  and  to  make  real  wages  lower.  In  the  opinion 
of  the  tariff  board,  the  highest  production  cost  in  the 
world,  of  the  merino  wools  largely  required  by  American 
mills,  is  in  the  state  of  Ohio  and  near-by  surrounding 
territory ; *  yet  a  high  protective  tariff  on  raw  wool  so 
shut  off  the  supply  from  abroad  as  to  cause  large  produc- 
tion of  it  in  that  region.  That  the  general  effect  of  this 
protection  to  raw  wool,  accorded  by  the  Payne-Aldrich 
tariff  bill,  must  have  been  to  lower  wages  while  probably 
raising  the  rents  of  land  owners,  hardly  seems  open  to 
serious  question. 

§5 
The    Effect  of   Protection    on    Wages   and    Rent    when 

Unprotected  Goods  are  Produced  under  Conditions  oj 

Sharply  Increasing  Cost 

We  may  now  consider  a  third  possibility  as  to  costs  of 
production,  viz.  that  the  protected  goods,  e.g.  linen,  are 
produced  under  conditions  of  nearly  constant  cost, 
while  the  unprotected  goods,  e.g.  wheat,  are  produced 
under  conditions  of  increasing  cost.  Under  these  cir- 
cumstances, not  much  labor  can  be  turned  into  linen 
manufacturing  without  lowering  the  marginal  labor  cost 
of  producing  wheat.  For  as  labor  is  diverted  from 
wheat  to  linen  production,  the  poorer  wheat  lands  are 
deserted,  and  on  the  better  lands  a  week's  labor  can 
produce  more  than  20  bushels.     If,  therefore,  Canada's 

1  Report  of  the  Tariff  Board  on  Schedule  K  of  the  Tariff  Law,  191 2,  Vol.  I, 
Part  I,  pp.  10,  11. 


PROTECTION  AND  DISTRIBUTION  101 

tariff  effectively  excludes  foreign  linen,  either  Canadian 
linen  will  sell  for  more  than  $1.43  a  yard  or  Canadian 
wheat  for  less  than  $1  a  bushel  or  both  such  changes  will 
occur.  Otherwise  no  one  will  desert  any  but  the  very 
worst  wheat  lands  in  order  to  produce  linen.  Competi- 
tion of  wheat  raisers  who  would  rather  sell  wheat  for  less 
than  $1  a  bushel  than  linen  for  only  $1.43  a  yard  will 
tend  to  keep  wheat  prices  down.  Reluctance  of  such 
persons  to  produce  linen  will  tend  to  keep  linen  prices  up. 
The  ratio  of  the  value  of  a  bushel  of  wheat  to  the  value  of 
a  yard  of  linen  must  lie  at  such  a  point  that  returns  to 
marginal  producers  (i.e.  producers  having  the  least  favor- 
able situations,  but  whose  goods  are  nevertheless  de- 
manded), shall  be  about  equal  in  both  lines.  Hence,  it 
will  take  more  than  20  bushels  of  wheat  to  equal  in  value 
14  yards  of  linen.  If  Canada  were  financially  isolated 
and  the  quantity  of  money  in  Canada  remained  un- 
changed, we  should  expect  that  the  changed  conditions 
of  cost  would  be  accompanied  by  both  a  rise  of  linen 
and  a  fall  of  wheat  prices.  Unless  there  was  an  increased 
quantity  of  currency  in  Canada,  a  rise  of  the  price  of  linen 
above  $1.43  a  yard  could  hardly  take  place  (other  things 
equal)  without  a  fall  in  the  price  of  wheat  below  $1 ;  and 
unless  there  was  a  decreased  supply  of  currency,  wheat 
could  hardly  fall  below  $1  without  there  being  a  rise  in 
the  price  of  linen  above  $1.43. 

But  with  Canada  maintaining  a  gold  standard,  the 
common  standard  of  most  of  the  commercial  world,  and 
having  a  foreign  market  for  her  wheat,  the  price  of  the 
wheat  cannot  greatly  fall.  Any  tendency  of  the  price 
to  fall,  in  Canada,  would  be  counteracted  by  exportation 
and  sale  abroad  at  world  market  prices.  Any  change  in 
relative  values  will  be  through  a  rise  in  price  of  linen 


102    ECONOMIC  ADVANTAGES  OF  COMMERCE 

above  $1.43,  rather  than  through  a  fall  in  price  of  wheat 
below  $1.  Since  importations  of  goods  into  Canada 
are  interfered  with,  there  must  be  for  a  time  a  net  money 
inflow,  and  there  must  be  a  money  inflow  for  wheat  if 
and  so  long  as  it  sells  for  much  less  than  $1  a  bushel. 
This  inflow  of  money  into  Canada  tends  to  raise  average 
prices  in  the  proportion  of  the  money  inflow.  Were  the 
wheat  produced  under  conditions  of  approximately 
constant  cost,  the  inflow  of  money  must  necessarily  tend 
to  raise  its  price  in  the  same  proportion.  For,  since  it 
raises  prices  generally  in  that  proportion,  the  industry  of 
wheat  raising  must  yield  correspondingly  larger  money 
returns  or  it  would  be  less  profitable  than  others.  But 
under  conditions  of  increasing  cost,  the  circumstances  are 
different.  On  the  better  lands,  the  profits  of  wheat  rais- 
ing, even  with  the  higher  money  cost  of  production  and 
at  a  price  little  if  at  all  higher  than  before  the  tariff  was 
laid,  will  be  sufficient  to  keep  those  lands  under  cultiva- 
tion.1 Rather  than  turn  to  the  protected  industries,  such 
as  linen  manufacture,  until  Canada  only  produces  enough 
wheat  for  her  own  use  and  has  none  for  export,  and  until 
wheat  has  risen  in  price  in  the  same  ratio  that  money  has 
increased,  Canadian  farmers  on  the  better  lands  will 
prefer  to  remain  producers  of  wheat.  This  will  result 
in  a  supply  sufficient  to  keep  the  price  from  rising  very 
much  above  the  former  price.  In  fact,  if  we  assume 
wheat  production  to  be  the  line  of  industry  in  which 
Canada  is  relatively  the  most  efficient  and  wheat  to  be 
Canada's  chief  or  only  export,  we  must  conclude  that 
Canadian  wheat  cannot  rise  to  a  much  higher  price  than 
before,  despite  the  inflow  of  money.  For  wheat  can  be 
secured  in  large  quantities  from  many  other  sources  of 

1  Though  less  intensively  than  before. 


PROTECTION  AND  DISTRIBUTION  103 

production,  and  if  Canadian  wheat  rises  greatly  in  price, 
foreign  demand  for  Canadian  wheat  will  decrease, 
Canadian  producers  on  the  poorer  lands  will  give  up 
wheat  production,  and  Canadian  producers  on  the  better 
lands  will  accept  world  wheat  market  prices  rather  than 
abandon  wheat  production.  The  sale  abroad  of  Ca- 
nadian wheat  and  of  nothing  else  cannot,  by  causing  an 
inflow  of  gold,  raise  the  price  of  Canadian  wheat  very 
much  above  this  world  market  price,  since,  before  it  does 
so,  foreign  purchase  of  Canadian  wheat  will  cease,  the 
inflow  of  gold  will  cease,  and  the  rise  of  prices  will 
cease.1 

Assume  that,  as  a  result  of  protection,  Canadian  money 
increases  by  10  per  cent.  We  have  seen  that  average 
prices  will  tend  to  rise  by  10  per  cent,  in  addition  to  the 
original  43  per  cent  rise  of  the  protected  linen.  We  have 
seen  that,  under  our  supposed  conditions,  wheat  prices 
will  remain  substantially  unchanged.  Since  wheat  re- 
mains at  about  $1  a  bushel,  linen  will  rise  to  more  than 
$1.57  a  yard  and  wages  will  rise  to  more  than  $22  a 
week.2  It  follows  that  there  is  a  possibility  of  gain,  for 
wage  earners,  from  a  limited  application  of  protection ; 
though,  as  we  shall  see,  the  probability  of  this  gain  being 
realized  in  practice  is  remote.  So  far  as  they  are  con- 
sumers of  protected  goods,  wage  earners  lose  because 
of  the  rise  in  prices  of  these  goods,  occasioned  by  the 
tariff.  But  so  far  as  wage  earners  are  able  to  buy  at 
substantially  the  former  prices,  goods  produced  under 
conditions  of  increasing  cost,  while  having  money  wages 

1  Canadian  prices  cannot  rise  indefinitely  in  relation  to  foreign  prices  unless 
Canada  is  such  a  centre  of  gold  production  that  prices  rise  without  export  of 
goods  and  unless,  also,  all  imports  are  forbidden,  and  so  outflow  of  this  gold  is 
prevented. 

2  That  is,  by  more  than  10  per  cent  on  $  20. 


104    ECONOMIC  ADVANTAGES  OF  COMMERCE 

greater  by  more  than  the  average  rise  of  prices,  with 
which  to  buy  these  goods,  they  are  gainers. 

On  the  other  hand,  owners  of  land  —  in  this  case, 
farming  land  —  are  losers.  And  they  lose  more  than 
wage  earners  gain.  Land  which  it  previously  paid  to 
cultivate  can  no  longer  be  cultivated  with  profit.  Land 
which  previously  yielded  a  large  surplus,  after  wages 
were  paid,  now  yields  a  smaller  surplus.  Since  the  wheat 
land  owners  (and  that  means,  in  large  part,  the  farmers) , 
get  practically  no  higher  prices  for  their  wheat,  the  higher 
money  wages  which  they  have  to  pay  are  to  them  an 
unbalanced  loss.  So  are  the  higher  prices  they  must  pay 
for  protected  and  other  goods.  Their  loss  through  having 
to  pay  higher  wages  to  those  they  employ  is  not  cancelled 
for  the  nation  as  a  whole  by  a  corresponding  gain  to  their 
employees,  since  the  latter  have  to  pay  higher  prices  for 
linen.  Neither  are  the  higher  prices  which  farmers  and 
other  land  owners  must  pay  for  linen  balanced  by  the 
higher  money  wages  paid  to  linen  makers,  for  these 
wages  are  higher  only  by  virtue  of  the  secondary  rise 
resulting  from  the  inflow  of  gold  (the  original  43  cents 
rise  directly  due  to  the  tariff  merely  making  it  possible 
to  get  the  same  wages  in  linen  making  as  were  previously 
given  in  wheat  producing) ;  while  both  the  original  rise 
which  does  not  raise  wages  and  the  secondary  rise  which 
does,  must  be  borne  by  farmers  desiring  to  purchase 
linen.  It  seems  fair  to  conclude,  therefore,  that  if  wage 
earners  ever  do  gain  by  a  protective  tariff,  they  gain  at 
the  greater  expense  of  farmers  or  some  other  class. 
As  shown  in  the  previous  chapter,  average  wealth  is 
decreased. 

The  conclusion  that  a  protective  tariff  establishing  an 
industry  of  relatively  constant  cost,  and  decreasing  the  ex- 


PROTECTION  AND  DISTRIBUTION  105 

tent  of  an  industry  of  increasing  cost,  might  raise  wages 
at  the  expense  of  land  rent,  applies  equally  if  we  suppose 
the  protectionist  country  to  have  an  inconvertible  paper 
money  which  will  not  be  increased  by  an  inflow  of  gold. 
Suppose  Canada  to  have  such  a  currency.  Then,  as  we 
have  seen,1  the  original  rise  of  linen  to  $1.43  is  not  fol- 
lowed by  the  10  per  cent  further  rise  in  the  average  of 
prices.  But  the  value  relation  of  foreign  money  to 
Canadian  money  will  change,2  so  that  it  takes  more  for- 
eign money  than  before  to  buy  a  given  amount  of 
Canadian  money,  and  therefore  of  Canadian  goods.  To 
tempt  wheat  producers  away  from  any  but  the  worst 
lands  will  require  a  rise  of  linen  above  $1.43.  On  the 
other  hand,  the  price  of  wheat  will  fall  below  $1  a  bushel, 
since  it  can  be  produced  more  cheaply  on  the  better  lands 
and  since  the  greater  value  of  Canadian  money  compared 
to  foreign  money  will  prevent  the  export  of  any  wheat 
except  at  less  than  $1  a  bushel.  Money  wages  will  remain 
about  the  same,  $20  a  week.  Wheat  will  be  cheaper. 
Wage  earners  may  be  better  off,  but,  if  so,  only  at  the 
expense  of  even  greater  loss  to  agricultural  land  owners.3 
The  possible  gain  of  wage  earners  and  loss  to  agricul- 
tural land  owners  and  farmers,  can  perhaps  be  most 
clearly  shown  if  we  omit  reference  to  money  and  money 
prices.  When  the  Canadian  tariff  shuts  out  linen  from 
abroad,  the  value  of  linen,  in  Canada,  will  rise  in  terms 

1  Chapter  IV  (of  Part  II),  §  3. 

2  See,  for  example,  Part  I,  Ch.  VI,  §§  6,  7,  8,  9,  and  Part  II,  Ch.  IV,  §  3. 

3  A  restrictive  export  tax  on  wheat  might  have  a  like  result  on  the  relative 
interests  of  economic  classes,  though  having  an  opposite  result  on  the  general 
price  level.  Such  a  tax  would  cause  prices  to  fall  and  would  drive  industry 
from  wheat  raising  into  other  lines.  But  it  might,  conceivably,  by  preventing 
production  of  wheat  for  export  and  forcing  out  of  cultivation  the  poorer  lands, 
reduce  wheat  prices,  in  Canada,  more  than  it  reduced  prices  in  general  or  money 
wages. 


106     ECONOMIC  ADVANTAGES  OF  COMMERCE 

of  wheat  until  it  becomes  profitable  for  men  to  leave  off 
cultivating  the  less  fertile  and  less  desirably  situated 
lands,  in  order  to  manufacture  linen.  Instead  of  20 
bushels  buying  20  yards,  as  before,  when  the  linen  was 
purchased  abroad,  20  bushels  will  buy  less  than  14  yards 
and  14  yards  will  buy  more  than  20  bushels.  For  if 
14  yards  of  linen  would  buy  but  20  bushels  of  wheat, 
only  those  on  the  very  worst  lands,  if  even  those,  would 
find  it  profitable  to  change  from  wheat  to  linen  produc- 
tion. If,  when  a  new  equilibrium  is  reached,  the  worst 
lands  still  cultivated,  and  the  marginal  labor  on  all 
wheat  lands,  yield  25  bushels  a  week  per  cultivator,1 
while  it  requires  a  week's  labor  to  make  14  yards  of 
linen,  then  25  bushels  will  exchange  for  14  yards.  Since 
considerable  labor  is  diverted  into  linen  manufacture  at 
a  wage  of  not  more  than  14  yards  (or  its  equivalent  in 
other  form),  a  week's  wages  in  wheat  production  will 
be  not  more  than  and  not  much  less  than  25  bushels  a 
week  (or  the  equivalent  in  other  form).  At  any  appre- 
ciably less  wage,  demand  for  labor  would  exceed  supply, 
because  at  any  less  wage  it  would  pay  to  hire  more  men, 
to  cultivate  land  more  intensively,  and  to  cultivate 
worse  land,  while  at  any  less  wage,  labor  could  not  so 
easily  be  kept  from  the  linen  factories  and  at  work  on 
the  farms.  Wages  in  terms  of  linen  are  less  (14  yards  in- 
stead of  20)  because  of  the  tariff.  Wages  in  terms  of 
wheat  are  greater  (25  bushels  instead  of  20)  because  of 
the  tariff.  If  the  wage  earner  has  occasion  to  consume 
much  wheat  and  to  use  little  linen,  his  real  wages,  in 
this  very  hypothetical  case,  will  be  higher.2     Owners  of 

1  That  is,  if  the  last  man  hired  adds  that  much  to  the  total  product.  See 
§  2  of  this  chapter  (V  of  Part  II). 

*  Cf.  Loria  in  the  Journal  of  the  Royal  Statistical  Society,  Vol.  L,  on  "Effects 
of  Import  Duties  in  New  and  Old  Countries,"  18S7,  pp.  408-410;     Patten, 


PROTECTION  AND  DISTRIBUTION  107 

wheat  lands,  including  farmers,  will  lose  what  the 
wage  earners  they  hire  gain,  and  will  lose,  besides, 
from  the  higher  price  of  linen  in  terms  of  wheat.  The 
wheat-producing  wage  earners  will  not  gain  in  real  wages 
what  the  farmers  who  pay  them  lose,  for  it  will  take  more 
wheat  than  before  to  buy  14  yards  of  linen.  Neither 
will  the  linen-making  workmen  gain  as  much  from  the 
higher  price  of  linen  in  terms  of  wheat,  as  the  wheat 
producers  and  owners  of  wheat  lands  lose,  for  the  linen 
makers  gain  what  the  wheat  raisers  and  land  owners  lose, 
only  to  the  extent  that  they  trade  their  linen  wages  for 
wheat.  So  far  as  they  themselves  have  some  use  for 
linen,  they  also  lose. 

We  are  brought  back,  then,  by  another  route,  to  the 
conclusion  that  a  protective  tariff  will  only  add  to  the 
wealth  or  income  of  one  person  or  class  by  taking  a  larger 
amount  of  wealth  or  income  away  from  some  other 
person  or  class.1     It  is  conceivable,  though,  as  we  shall 

Economic  Basis  of  Protection,  Philadelphia  (J.  B.  Lippincott  Co.),  i8gs,  Ch. 
V ;  and  Bastable,  The  Theory  of  International  Trade,  fourth  edition,  London 
(Macmillan),  1903,  p.  105. 

1  A  number  of  economists  (e.g.  Sidgwick,  Edgeworth,  Carver)  have  appar- 
ently been  led  to  the  opinion  that  protection  might  not  only  raise  wages  but 
might  even  increase  the  total  national  wealth  by  drawing  labor  out  of  lines  of 
increasing  cost;  or  that  the  removal  of  protection  to  manufactures  and  other 
industries  of  relatively  constant  cost  might  decrease  national  productiveness  as 
well  as  reduce  wages.  Sidgwick,  for  instance,  imagined  a  protectionist  country 
of  limited  natural  resources  suddenly  becoming  a  free  trade  country,  and  its 
manufacturing  population,  previously  protected,  being  thereupon  undersold  by 
foreigners  and  driven  out  of  business  and  being  unable  to  obtain  employment 
in  agriculture  (The  Principles  of  Political  Economy,  London,  Macmillan,  1887, 
pp.  496-498).  But  if  agricultural  resources  were  in  such  a  country  so  limited 
as  to  give  little  or  no  employment  to  the  former  manufacturing  population, 
then  this  population  would  remain  chiefly  or  entirely  in  manufacturing,  accept- 
ing the  lower  wages  required  for  competition  with  the  imported  goods.  This, 
however,  could  not  possibly  decrease  the  national  wealth  (except  as  the  reduced 
wages  might  affect  efficiency)  for  the  land  owners  would  gain  as  much  as  the  wage 
earners  would  lose.  Employment,  at  some  level  of  wages,  would  continue,  and 
production  would  continue.     If,  with  removal  of  protection,  it  proved  possible 


108     ECONOMIC  ADVANTAGES  OF  COMMERCE 

see,  far  from  probable,1  that  wage  earners  may  be  the 
gainers  and  land  owners  the  losers  by  such  a  policy. 

Let  no  one  welcome  this  conceivable  consequence  of  a 
carefully  devised  tariff  system,  on  the  ground  that  the 
situation  or  fertility  rent  secured  by  the  owners  of  supe- 
rior land,  is  unearned.  Assuming  that  it  is  unearned  (and 
it  is  no  part  of  the  function  of  this  book  to  discuss  at 
length  whether  or  not  land  rent  is  unearned) ,  a  change  in 
the  taxing  system  securing  to  the  public  its  full  rights 
to  any  such  unearned  wealth  or  income  would  be  more 
sensible  than  a  partial  loss  of  such  wealth  or  income 


to  employ  more  productively  in  agriculture  even  a  few  of  those  previously  en- 
gaged in  manufacturing,  the  total  national  wealth  would  be  increased  even  though 
wages  might  fall.  The  discussions  on  this  phase  of  protection  between  Profes- 
sors Bastable  and  Edgeworth,  in  the  Economic  Journal  (Vol.  X,  1900,  pp.  380- 
393  and  Vol.  XI,  1901,  pp.  226-229  and  582-590)  seem  to  the  present  writer 
not  to  bring  out  clearly  this  distinction  between  the  effect  on  national  wealth 
and  the  effect  on  wages.  (See  also  Bastable,  The  Theory  of  International  Trade, 
pp.  187-197) 

Carver  (Publications  of  the  American  Economic  Association,  Third  Series, 
Vol.  Ill,  pp.  176-182)  uses  a  different  illustration  to  establish  what  seems  to 
be  the  same  conclusion  as  that  of  Sidgwick.  He  supposes  a  piece  of  land  which, 
in  the  absence  of  protection  or  some  form  of  legal  discrimination,  will  allow  the 
employment  of  one  man  in  sheep  raising,  while  it  might  otherwise  employ  20 
men  in  wheat  production.  The  total  product,  he  assumes,  would  be  greater 
in  the  latter  case ;  but  the  land  owners'  rent,  if  trade  were  thus  interfered  with, 
would  be  lower.  Removal  of  restrictions  might  throw  19  men  out  of  work.  In 
criticism  of  this  view  it  is  to  be  said  that  there  are  two  extreme  possibilities. 
Either  the  19  men  have  a  preferable  alternative,  under  the  free  trade  regime,  to 
wheat  raising,  or  they  have  not.  If  they  have  not,  they  will  accept  low  enough 
wages,  rather  than  be  unemployed  and  have  nothing,  so  that  the  land  owner 
can  realize  as  much  rent  for  his  land  (or  more)  as  if  he  used  it  for  a  sheep  run. 
Unless  their  efficiency  is  thus  impaired,  they  will  then  produce  as  much  wheat 
as  if  they  were  protected.  The  effect  of  freedom  from  restriction  may  be  seen 
in  lower  wages  and  higher  rent,  but  not  in  decreased  national  wealth.  If,  how- 
ever, they  have  a  preferable  alternative,  these  19  men  will  not  raise  wheat  but 
will  occupy  themselves  otherwise  at  higher  wages  than  wheat  raising  under 
free  trade  would  yield  them,  while  the  land  owner  will  at  the  same  time  realize 
the  higher  rent  assumed  to  result  from  using  his  land  as  a  sheep  run.  Free 
trade  would  then,  also,  raise  rent  more  than  it  would  lower  wages. 
1  Shown  in  remainder  of  this  section  (5). 


PROTECTION  AND  DISTRIBUTION  109 

because  of  restrictions  on  trade.  At  any  rate,  those 
who  support  protection  with  the  argument  that  it  can 
be  made  to  benefit  wage  earners  at  the  expense  of  land 
rent,  should  be  the  last  to  oppose  direct  taxation  of  rent. 

In  practice,  the  likelihood  of  devising  a  tariff  which 
shall  benefit  wage  workers  at  the  expense  of  farmers  is 
extremely  small.  Such  a  tariff  must,  in  the  first  place, 
turn  enough  labor  from  agriculture  into  other  lines  to 
raise,  appreciably,  the  margin  of  cultivation.  That  is, 
so  much  of  the  poorer  land  previously  cultivated  must 
be  left  uncultivated,  that  the  poorest  land  remaining  in 
use  is  appreciably  better  than  the  poorest  land  which 
was  in  use.  Otherwise,  wages  in  terms  of  wheat  cannot 
be  appreciably  higher,  for  owners  of  the  poorer  lands 
cannot  pay  higher  wages,  and,  unless  labor  is  so  strongly 
drawn  into  other  lines  that  they  have  to,  owners  of  the 
better  lands  will  not.  To  have  any  appreciable  favorable 
effect  on  wages,  protection  must,  therefore,  set  up  large 
industries  or  many  industries,  giving  employment  to 
many  men. 

But  if  protection  is  to  be  of  benefit  to  wage  earners,  it 
must  be  levied  on  goods  consumed  not  at  all  or  only  to  a 
very  limited  extent  by  them,  and  on  no  other  goods,1 
so  that  any  rise  of  money  wages  which  may  take  place, 
shall  not  be  more  than  offset  by  higher  prices  of  goods 
workingmen  have  to  buy.2  The  problem  of  drawing  a 
large  amount  of  labor  away  from  agriculture  (usually 
regarded  as  an  industry  of  increasing  cost,  though  it  is 
by  no  means  always  an  industry  of  rapidly  increasing 

1  Or,  at  least,  only  slightly  on  other  goods. 

2  This  loss  to  wage  earners  is  borne  not  the  less  if  they  buy  goods  made  by 
machinery  which  has  been  raised  in  price  by  protection,  or  transportation  from 
railway  companies,  etc.,  which  have  to  charge  more  because  of  expensive  ma- 
terials. 


no    ECONOMIC  ADVANTAGES  OF  COMMERCE 

cost)  into  industries  (e.g.  many  kinds  of  manufacturing) 
of  relatively  constant  cost,  and  selecting,  as  industries 
into  which  to  draw  this  labor,  only  those  producing  goods 
little  used  by  the  masses,  is  indeed  a  problem  hard  to 
solve  and  a  problem  which,  in  the  exigencies  of  practical 
politics,  is  unlikely  ever  to  be  solved. 

As  a  matter  of  fact,  few  men  in  practical  politics  would 
dare  advocate  such  protection,  frankly  stating  its  in- 
tended result  and  how  the  result  was  to  be  attained  ;  for 
most  men  in  politics  would  quickly  realize  that  such  an 
advocacy  would  be  likely  to  array  against  them  the  oppo- 
sition at  the  polls  of  nearly  all  the  farmers.  Our  own 
(United  States)  protective  tariff  has  been  levied  on  raw 
wool,  woolen  cloth,  cotton  cloth,  sugar,  fruit,  potatoes, 
shoes,  coal,  etc.  It  has  been  very  far  from  being  a  tariff 
which  would  raise  wages  at  the  greater  expense  of  rent. 
Rather  has  it  been  a  general  grab  in  which  as  many 
interests  as  possible  have  tried  to  get  something  at  the 
expense  of  the  general  interest.  It  requires  no  argument 
to  show  that  our  protection  has  not  been  designed  to 
avoid  the  things  that  the  masses  of  working  people  have 
to  consume.  Nor  has  it  by  any  means  avoided  goods 
produced  under  conditions  of  increasing  cost,  protection 
of  which  is  likely  to  raise  land  rents,  to  the  greater  loss 
of  wage  earners.  From  the  log  rolling  of  actual  political 
struggle,  there  is  likely  to  issue  a  hodge-podge  of  tariff 
rates,  causing  loss  to  nearly  all.  The  general  average 
of  American  wages  might  be  made  higher  by  shutting  out 
the  immigrant  laborers  who  enter  this  country  as  com- 
petitors of  those  already  here ;  but  the  average  American 
real  wages  are  distinctly  not  raised  by  shutting  out  and, 
therefore,  making  scarce  and  dear,  the  goods  which  wage 
workers  desire  to  consume. 


PROTECTION  AND  DISTRIBUTION  in 

§6 

How  Protection  May  Benefit  One  Section  of  a  Country  at 
the  Expense  of  Other  Sections 

A  protective  tariff  may  benefit  absolutely  one  section 
of  a  country,  including  manufacturers,  wage  earners,  and 
farmers ;  but  if  so,  only  at  the  greater  expense  of  some 
other  section  or  sections.  Protection  to  manufacturers 
of  woolen  cloth,  in  certain  sections  of  New  England,  may 
benefit  people  in  those  sections,  who  are  unwilling  to 
move  elsewhere,  by  making  purchasers  of  cloth  in  other 
parts  of  the  United  States  pay  tribute  to  them.  It  may 
conceivably  even  work  a  benefit  to  farmers  and  farm 
land  owners  in  the  immediate  vicinity  of  the  protected 
mills,  since  the  protected  mill  owners  and  mill  workers, 
though  gaining  something  at  the  expense  of  the  rest  of  the 
nation,  would  have  to  share  these  gains  with  local  dairy- 
men and  truck  farmers  in  order  to  get  the  latters'  ser- 
vices, just  as  they  would  have  to  share  these  gains  with 
local  building  contractors,  bricklayers,  and  so  forth.1 
The  gain,  if  there  is  a  gain,  is  not  equivalent  to  the  loss 
of  other  sections,  for  the  people  of  the  locality  benefited 
have  the  option  of  seeking  better  opportunities  in  these 
other  sections,  even  if  they  do  not  care  to  carry  on  other 
industries  where  they  are.  If  other  sections  have  greater 
resources,  then  artificially  to  prevent  migration  into  them 
is  to  diminish  national  prosperity,  is  to  decrease  wealth 
production  in  the  naturally  favored  sections  more  than  it 
is  increased  in  the  less  favored.  And,  in  any  case,  to 
turn  industry  into  a  line  it  would  not  otherwise  follow, 
is,  presumably,  to  diminish  national  prosperity.  The 
policy,  when  all  sections  are  considered,  brings  a  net  loss. 

1  Cf.  Taussig,  Principles  of  Economics,  New  York  (Macmillan),  igu,  Vol.  I 
p.  511. 


ii2     ECONOMIC  ADVANTAGES  OF  COMMERCE 

While  there  is  reasonable  ground  for  the  opinion  that  no 
large  section  of  the  United  States  has  really  gained 
by  the  long  continued  maintenance  of  protective  duties, 
or  could  gain  more  than  it  would  lose,  in  the  general 
compromise  of  protective  tariff  making,  yet  certain 
parts  of  the  country  have  felt  themselves  particularly 
injured.  This  has  been  the  feeling  in  most  of  the 
Southern  states,  and  is  one  explanation  for  the  phenom- 
enon of  a  "solid  South."  The  cotton-raising  states  have 
realized  that  their  staple  product  must  be  in  part  ex- 
ported, and  that  a  protective  tariff  could  not  appre- 
ciably, if  at  all,  raise  its  price.  And  they  have  known 
full  well  that  the  prices  of  many  things  they  have  had 
to  buy  have  been  very  considerably  raised  in  price  by  the 
tariff.  The  wheat-producing  areas  of  the  middle  West 
and,  doubtless,  certain  manufacturing  centres  of  the  East, 
have  been  in  a  similar  situation. 

It  is  probably  such  facts  as  these,  which  have  appar- 
ently produced  in  the  minds  of  some  of  our  public  men 
the  feeling  that  a  protective  tariff  is,  in  spirit,  unconsti- 
tutional, a  feeling  which  found  recent  expression  in  the 
National  Democratic  platform  of  191 2.  The  Federal 
Constitution  has  given  to  Congress  and  the  President 
the  right  to  levy  import  duties  and  the  right  to  regulate 
commerce  with  foreign  nations.  The  passing  of  a 
protective  tariff  law  has  always  been  regarded  as  but  an 
exercise  of  these  powers.  There  is  little  reason  to  sup- 
pose that  any  Federal  court  would  set  aside  a  tariff  law  as 
unconstitutional  merely  because  it  was  protective.  A 
court  would  not  be  likely  to  go  behind  the  professed 
intent  of  Congress  and  the  letter  of  the  Constitution,  in 
order  to  raise  questions  regarding  the  ultimate  economic 
effects  of  the  laws  passed.     Such  questions  would  be 


PROTECTION  AND  DISTRIBUTION  113 

assumed  to  be  questions  for  the  legislature  and  not  the 
judiciary  to  decide.  Therefore,  Congress  and  the  Presi- 
dent must  themselves  decide  upon  the  constitutional 
justification  of  a  protective  tariff.  But  the  contention 
that  to  use  either  the  tax-levying  power  or  the  power  to 
regulate  commerce,  in  such  a  way  as  to  compel  the  people 
of  some  states  to  pay  tribute  to  producers  in  other  states, 
is  contrary  to  the  real  spirit  of  a  constitution  framed  as 
the  basis  for  a  federation  of  states,  is  a  contention  not 
without  a  degree  of  plausibility. 

§7 

Protection  as  an  Encouragement  to  Monopoly 

In  its  practical  results,  the  tariff  is  likely  to  operate 
in  taxing  the  entire  nation,  not  for  the  benefit  of  all  the 
people  in  any  one  section,  but  for  the  protection  of  mo- 
nopoly profits.  Though  a  tariff  schedule  may  not  be  at 
first  devised  for  this  purpose,  —  and  of  course  it  would 
not,  at  least  openly,  be  so  devised,  —  it  comes  to  have 
this  effect  if  it  encourages  combination.  This  the  tariff 
is  likely  to  do.  For  it  protects  producers  against  foreign 
competition  and  so  suggests  to  them  the  hope  that,  by 
combining  among  themselves,  they  may  realize  monopoly 
profits.  A  protective  tariff  which  has  only  this  effect 
cannot  be  said  to  benefit  the  masses  of  the  people  in  any 
section.  It  certainly  has  no  effect  on  real  wages  other 
than  to  lower  them,  if,  as  is  usually  the  case,  the  goods 
produced  are  goods  largely  consumed,  directly  or  in- 
directly, by  working  people.  For  the  only  way  the  tariff 
can  possibly  create  or  maintain  monopoly  profits,  is  to 
create  or  maintain  monopoly  prices ;  and  that  means  that 
it  takes  money  from  the  masses  of  the  people,  in  order  to 
give  it  to  monopolists. 
part  n  —  1 


ii4    ECONOMIC  ADVANTAGES  OF  COMMERCE 

§8 

Summary 

We  have  now  to  summarize  the  conclusions  we  have 
reached  regarding  the  effect  of  protection  on  classes  and 
sections.  Because  protection  tends  to  diminish  national 
wealth,  it  has  a  tendency  to  restrict  the  extent  of  round- 
about production,  to  make  the  rate  of  interest  higher 
(though  not  necessarily  the  total  amount  of  interest), 
and  to  make  wages  lower.  This  is  an  indirect  effect. 
But  there  is  a  more  obvious  direct  action.  When 
both  protected  and  unprotected  goods  are  produced,  in 
the  protectionist  country,  under  conditions  of  approxi- 
mately constant  cost,  the  effect  of  protection  is  to  reduce 
real  wages.  If  the  protectionist  country  and  those 
trading  with  it  have  a  common  monetary  standard,  then 
money  wages  in  the  former  will  rise  and  money  prices 
will  rise  in  the  same  proportion,  except  that  there  will  be 
a  special  rise  of  the  protected  goods,  in  addition,  so  that 
real  wages  will  be  lower.  Assuming  the  protected  in- 
dustry to  be  one  of  increasing  cost,  while  the  unprotected 
industries  are  of  relatively  constant  cost,  it  appears  that 
protection  may  benefit  land  owners  by  raising  land  rents, 
but  that  the  gain  of  land  owners  must  be  less  than  the  loss 
of  wage  earners. 

On  the  other  hand,  there  is  a  conceivable  case  in  which 
wage  earners  gain  at  the  greater  expense  of  land  owners, 
viz.  when  the  protected  goods  are  produced  under  con- 
ditions of  relatively  constant  cost  and  unprotected  goods 
under  conditions  of  increasing,  perhaps  sharply  increas- 
ing, cost,  and  when  wage  earners  are  chiefly  concerned, 
as  consumers,  with  unprotected  goods.  Given  these 
conditions,  real  wages  will  be  higher  because  of  protection, 


PROTECTION  AND  DISTRIBUTION  115 

and  the  rents  of  land  (in  our  illustration,  the  profits  of 
farmers)  will  be  lower.  But  the  owners  of  land  lose  more 
than  the  wage  earners  gain.  Assuming  the  usual  inter- 
national monetary  relations,  money  wages  will  rise; 
money  prices  of  protected  goods  will  rise  more ;  money 
prices  of  the  unprotected  goods  produced  under  condi- 
tions of  increasing  cost  will  rise  little  or  not  at  all. 

It  appeared,  however,  that  the  mere  devising  of  a 
tariff  to  have  this  result  would  be  difficult,  since  it  would 
be  almost  impossible  to  divert  much  labor  from  the  indus- 
try or  industries  of  increasing  cost  and  so  to  make  possible, 
in  that  industry  or  those  industries,  higher  wages,  without 
protecting  the  production  of  and  raising  the  prices  of, 
goods  largely  consumed  by  wage  workers.  The  practical 
difficulties  in  the  way  of  passing  such  a  tariff  act  ap- 
peared to  be  no  less  great.  The  conflict  of  various 
interests  is  not  likely  to,  and  presumably  never  did, 
result  in  a  tariff  act  which  would  raise  wages  at  the  ex- 
pense of  land  rent.  Even  supposing  such  an  act  to  be 
practically  possible,  and  assuming  that  most  or  all  of 
land  rent  is  an  unearned  income  belonging  properly  to 
the  whole  people,  we  must  conclude  that  direct  taxa- 
tion of  such  rent  would  secure  the  larger  general  welfare 
and  the  less  waste,  as  compared  with  the  indirect  and  very 
partial  appropriation  of  it  and  partial  waste  of  it,  in- 
volved in  the  protective  tariff  policy. 

Protection  can,  it  was  shown,  benefit  a  considerable 
territory  within  the  protected  group  at  the  greater 
expense  of  another  section  of  the  same  nation.  In  the 
United  States,  the  South  has  usually  felt  itself  to  be  a 
sufferer  by  the  policy.  Protection  may  also  build  up  and 
secure  against  foreign  competition,  monopolies,  and  so 
injure  the  general  public  for  the  benefit  of  a  compara- 
tively few. 


CHAPTER  VI 

A  Consideration  of  Some  Special  Arguments  for 
Protection 


The  Argument  that  Protection  is  Desirable  Because  it 
Keeps  Money  in  the  Protected  Country 

One  of  the  cruder  popular  arguments  for  protection 
is  that  it  keeps  the  people  of  the  protectionist  country 
from  spending  their  money  in  foreign  countries,  and  so 
gets  and  keeps  more  money  in  circulation  at  home.  It 
is,  of  course,  true,  as  we  have  seen,1  that  the  effect  of 
a  protective  tariff  is  to  decrease  imports,  while  still,  for  * 
a  short  time,  not  bringing  about  a  corresponding  decrease 
of  exports,  and  that  there  is,  in  consequence,  somewhat 
more  money  in  a  protectionist  country  than  otherwise 
there  would  be.  But  it  is  also  true  that  the  net  inflow 
of  money  or  of  gold  is  not  perpetual,  that  it  soon  reaches 
a  limit.  It  is  further  to  be  emphasized  that  money  or 
gold  is  not  the  thing  for  the  securing  of  which  trade  is 
really  carried  on.  No  one,  other  than  a  miser,  wants 
money,  except  that  he  may  pay  it  out  again  for  other 
goods. 

The  argument  in  favor  of  getting  money  into  the 
country  and  keeping  it  there,  occasionally  takes  the  form 
of  a  comparison  between  a  business  man  and  a  nation. 
It  is  asserted  that  a  business  man  is  reckoned  prosperous 

1  Chapter  IV  (of  Part  II),  §  i. 
116 


SPECIAL  ARGUMENTS  FOR  PROTECTION     117 

in  proportion  as  he  takes  in  more  money  than  he  pays 
out,  in  proportion  as  he  sells  more  goods  than  he  buys ; 
that  a  nation's  prosperity  is  similarly  to  be  secured  by 
selling  for  money  more  than  it  buys  with  money;  and 
that,  therefore,  a  limitation  on  purchases  from  abroad 
is  desirable. 

The  validity  of  such  a  comparison  is  sometimes  ques- 
tioned by  free  traders.  It  is  said  that,  since  a  nation 
is  not  the  same  as  a  single  individual,  what  conduces  to 
the  prosperity  of  the  latter  may  not  further  the  prosper- 
ity of  the  former.  But  free  traders  have,  as  such,  no 
occasion  to  question  the  validity  of  the  comparison, 
since  the  comparison  does  not  show  what  protectionists 
intend  it  to  show.  The  fact  is  that  a  successful  busi- 
ness man  does  not  take  in  more  money  than  he  pays  out. 
On  the  contrary,  he  is  always  anxious  to  expend  his 
money  (or  his  bank  deposit)  for  goods.  If  he  does  not 
spend  it  for  enjoyments,  he  will  wish  to  expend  it  by 
making  investments.  He  will  buy  automobiles,  yachts, 
residences,  theatre  tickets ;  or  he  will  purchase  factories, 
office  buildings,  railroad  shares,  machinery.  It  is  by 
the  one  type  of  purchases  that  he  endeavors  to  enjoy  his 
prosperity,  and  by  the  other  kind  of  purchases  that  he 
hopes  to  add  to  his  prosperity.  A  wealthy  man  is  not 
necessarily  one  who  has  a  large  amount  of  money  in  his 
pockets  or  one  who  has  a  large  checking  account.  More 
usually  his  assets  of  that  sort  are  small  compared  with 
his  property  in  railroads,  mills,  stores,  farms,  etc.  With 
a  nation,  which  is  a  collection  of  individuals,  the  aim 
should  be  similar.  A  nation  enjoys  its  prosperity,  in 
proportion  as  it  secures  many  services  and  many  goods 
for  immediate  consumption.  It  increases  its  prosperity 
in  proportion  as  it  secures,  from  abroad  if  it  can  get  more 


n8    ECONOMIC  ADVANTAGES  OF  COMMERCE 

by  purchasing  abroad,  large  capital  equipment  for  aid 
in  further  production.  For  a  nation  as  for  an  individ- 
ual, money  is  not  the  thing  most  to  be  desired,  but  the 
wealth  which  money  buys.  A  country  which  has  a 
large  amount  of  money  and  high  prices,  benefits  from  that 
fact  only  if  it  can  use  this  money  to  buy  goods  where 
prices  are  lower.  There  is  no  gain,  but  only  loss,  in 
preventing  purchase  abroad  in  order  to  get  and  keep 
money  within  a  protectionist  nation. 

§2 

The  Wages  Argument  for  Protection 

The  argument  for  protection,  which  has,  perhaps,  been 
most  persistently  urged  in  political  campaigns  within 
the  United  States  during  the  last  half  century  or  more, 
is  the  wages  argument.  We  have  already  discussed  at 
some  length  the  effect  of  protection  on  wages,1  and  need 
not  expand  greatly  upon  the  subject,  here. 

The  general  tendency  of  protection  is  to  divert  industry 
out  of  its  most  profitable  into  less  profitable  channels ; 
and  it  is  hardly  likely  that,  by  so  doing,  protection  will 
make  wages  higher.  We  may  rather  expect  that  it  will 
make  wages  lower.  In  fact,  as  we  have  seen,2  a  protec- 
tive tariff  cannot  directly 3  raise  any  wages  without 
raising,  in  the  same  degree,  the  prices  of  protected  goods. 
And  further,  as  we  have  also  seen,4  to  the  extent  that 
protection  operates  to  turn  men  into  less  productive 
lines,  those  whose  wages  are  nominally  raised  will  not 

«  See  Ch.  V  (of  Part  II). 

2  Chapter  IV  (of  Part  II),  §  2. 

3  The  improbability  of  a  tariff's  raising  wages  indirectly  has  been  sufficiently 
discussed  in  Ch.  V  (of  Part  II),  §  5. 

1  Chapter  IV  (of  Part  II),  §  2. 


SPECIAL  ARGUMENTS  FOR  PROTECTION     119 

gain  (if  they  do  gain)  as  much  as  others  lose.  Even  if 
they  secure,  in  the  protected  industry,  wages  as  much 
higher  than  they  could  otherwise  get  in  that  line  as  their 
employers  get  higher  prices  for  the  protected  goods, 
they  will  not  be  getting  wages  correspondingly  higher 
than  they  could  have  secured  in  the  natural  and  relatively 
more  productive  industries  of  their  country.  The  pre- 
sumption is,  that  not  only  average  real  wages,  but 
even  the  real  wages  of  those  employed  in  protected 
industries,  will  be  lowered  by  protection.  For  compe- 
tition, so  far  as  it  is  free,  tends  to  equalize  condi- 
tions ;  and  no  one  trade  of  wage  earners  can  there- 
fore hope  to  gain,  for  any  long  period,  by  means  of 
protection,  even  at  the  greater  expense  of  wage 
earners  in  other  trades.  Rather  will  all  probably 
share,  ultimately,  in  the  national  loss.  Though  wages 
measured  in  money  may  be  slightly  higher  under  pro- 
tection because  of  an  inflow  of  gold,  wages  measured 
in  the  necessaries,  comforts,  and  luxuries  of  life,  are 
practically  certain  to  be  lower. 

The  emphasis,  in  the  wages  argument  for  protection, 
is  sometimes  placed  on  the  alleged  danger  of  allowing 
American  workingmen  to  be  subject  to  the  competition 
of  cheap  foreign  labor,  the  competition  of  the  so-called 
''pauper  labor"  of  Europe.  The  truth  is  that  the 
"competition"  of  cheap  foreign  labor  cannot  do  other- 
wise than  benefit  the  country  as  a  whole.  Such  labor, 
e.g.  labor  engaged  in  the  production  of  woolen  cloth,  can 
only  injure  American  workingmen  employed  in  that 
industry,  by  benefiting  Americans  in  all  other  lines 
through  lower  prices  of  woolen  cloth.  And  the  Ameri- 
cans engaged  in  manufacturing  woolen  cloth  would  share 
in  this  benefit  when  they  had  turned  their  efforts  into 


120    ECONOMIC  ADVANTAGES  OF  COMMERCE 

other  lines  in  which  their  relative  efficiency  was 
greater.  If  it  is  really  so  dangerous  to  American  wage 
workers'  prosperity  to  have  goods  from  abroad  sold 
in  the  United  States  at  a  low  price,  and  the  more 
dangerous  the  lower  the  price,  then,  obviously,  it 
must  be  the  most  dangerous  of  all  if  the  goods  are 
given  to  us  for  nothing.1  What  ruin  to  our  in- 
dustries, what  poverty  and  suffering  must  be  caused, 
by  our  getting  quantities  of  goods  from  abroad  with- 
out having  to  produce  any  goods  to  send  in  return  ! 
For  if  we  thus  secure  goods  from  other  countries  for 
nothing,  we  are  able  to  devote  all  our  energies  to  in- 
creasing still  further  our  stock  of  wealth  and  our  flow 
of  income  services. 

Frequently  an  inductive  wages  argument  is  attempted, 
based  on  a  comparison  between  the  United  States  and 
England.  Attention  is  called  to  the  fact  that  wages  in 
England  are  lower  than  wages  in  the  United  States,  and 
it  is  implied,  if  not  asserted,  that  the  difference  is  due 
to  the  British  policy  of  free  trade  as  contrasted  with 
an  historic  American  policy  (now,  however,  possibly  in 
process  of  abandonment)  of  protection.  Yet  every  one 
who  is  familiar  with  and  able  to  distinguish  between  the 
legitimate  and  the  illegitimate  processes  of  reasoning, 
knows  that  such  a  comparison  has  little  or  no  value 
unless  other  things  are  equal,  or  unless  the  effects  of  the 
other  things  which  are  not  equal  are  known,  and  can  be 
subtracted  from  the  total  result.2  As  a  matter  of  fact, 
other  things  are  not,  in  this  comparison  between  England 
and  the  United  States,  at  all  equal.     England  is  much 

1  An  effective  turn  to  the  argument  given  by  Henry  George  in  his  very  read- 
able Protection  and  Free  Trade,  New  York  (Henry  George),  1891,  pp.  121-125. 
*  See  Mill,  System  0/  Logic,  Book  HI,  Ch.  VIII,  §  5  on  the  method  of  residues. 


SPECIAL  ARGUMENTS  FOR  PROTECTION     121 

more  crowded  than  the  United  States,  and  its  resources, 
in  comparison  to  population,  are  less.  With  thirty- 
three  millions  of  people  struggling  to  make  a  living  in  a 
country  about  the  size  of  the  state  of  Illinois  (which  has 
a  population  of  something  like  two  millions),  England 
can  hardly  be  expected  to  be  a  country  of  as  high  wages 
as  the  United  States.  Because  of  the  law  of  diminishing 
returns,  wages  in  England  must  be  comparatively  low 
in  order  that  the  demand  for  labor  shall  equal  the  supply. 
It  is  true  that  the  people  of  England  are  not  confined  to, 
and  are  not  mainly  occupied  in,  agriculture.  England 
is  primarily  a  manufacturing  and  commercial  nation. 
But  the  point  is,  that  England  has  to  engage  in  indus- 
tries employing  many  persons  per  unit  space,  in  order 
to  support,  comfortably,  so  large  a  population  in  so  small 
an  area.  Hence,  England  has  to  engage  in  commerce 
and  manufacturing,  even  if  competition  with  other 
crowded  countries  and  parts  of  countries,  reduces  the 
profits  and  wages  which  can  be  earned  to  a  comparatively 
low  level,  and  even  though  far  distant  markets  must 
be  sought  and  raw  materials  imported,  at  considerable 
expense,  from  abroad.  In  a  country  like  the  United 
States,  however,  there  is  always  the  alternative  of  going 
into  agriculture,  or  mining,  or  manufacturing  for  which 
resources  are  available  near  at  hand,  and  hence  wages 
tend  to  remain  at  a  higher  level.  Wages  in  the  United 
States  have  been  high,  not  because  of  a  protective 
tariff  which  has  tended  to  lower  them,  but  because  of 
the  favorable  relation  of  population  to  natural  resources. 
Wages  in  the  United  States  are  in  danger  of  being  low- 
ered, not  by  free  trade,  which  would  tend  to  raise  them, 
but  by  immigration  from  the  crowded  and  low-wage 
countries,  by  immigration  which  increases  the  supply 


122     ECONOMIC  ADVANTAGES  OF  COMMERCE 

of  labor,  lowers  the  margin  of  cultivation  toward  foreign 
levels,  and  makes  necessary  low  wages  to  equalize  supply 
of  and  demand  for  wage  earners'  services.1 

§3 

The  Make-Work  Argument  for  Protection 

Closely  associated  with  the  wages  argument  is  the 
argument  that  protection  makes  employment.  It  is 
said  that  the  tariff,  by  shutting  out  various  foreign  goods, 
gives  encouragement  to  American  capital  and  labor  to 
engage  in  producing  such  goods.  If  protection  does  this, 
it  is  only  because  protection  makes  the  production  of 
such  goods  more  profitable.  For  even  without  the  de- 
fence of  the  tariff,  home  producers  in  any  industry  could 
have  the  entire  home  market  and  could,  therefore,  sell 
all  the  goods  which  that  market  would  take  —  as  well 
as  some  goods  abroad  —  if  they  would  make  low  enough 
prices,  if  employers  and  employees  together  would  be 
willing  to  carry  on  the  business  without  aid,  and  take 
what  it  could  earn.  The  tariff  simply  enables  them  to 
do  a  business  no  larger,  at  higher  prices,  and  therefore 
at  the  expense  of  persons  in  other  industries.  If  em- 
ployment is  increased  in  one  industry,  it  is  only  because 
that  industry  is  made  more  profitable  than  it  otherwise 
would  be  and  because  men  will  choose  the  employment 

1  If  immigrant  wage  earners  always  went  into  the  lowest  grade  labor,  and 
if  they  and  their  descendants  remained  in  this  labor  only,  their  competition  might 
not  lower  wages  in  other  work.  If  it  increased  the  demand  for  other  work  more 
than,  by  pushing  former  low  grade  labor  into  such  work,  it  increased  the  supply, 
wages  in  this  other  work  might  rise.  Conceivably,  most  native  labor  would 
find  employment  in  this  high  grade  work  (Hadley,  Economics,  New  York 
—  Putnam — ,  1906,  pp.  420-421).  But  in  a  few  generations,  the  descendants  of 
immigrants  are  competing  for  the  higher  positions  as  well  as  the  lower,  and, 
indeed,  it  would  be  more  difficult  to  realize  democratic  ideals  if  they  were  not. 
The  net  result  is  likely  to  be  a  reduction  of  wages  for  most  kinds  of  labor. 


SPECIAL  ARGUMENTS  FOR  PROTECTION     123 

that  pays  best.  Employment  is  made  less  profitable  in 
other  industries  than  it  would  else  be,  since  those  em- 
ployed in  these  industries  must  bear  the  tariff  burden. 
Will  not  the  protective  tariff,  therefore,  decrease  employ- 
ment in  these  other  industries  as  much  as  it  increases 
employment  in  the  favored  industry  or  industries? 

Another  way  to  look  at  this  matter  of  employment 
is  from  the  viewpoint  of  the  tariff's  effect  on  foreign 
trade.  In  a  previous  chapter  1  it  was  pointed  out  that 
any  serious  restriction  of  imports  brings,  eventually,  a 
corresponding  limitation  on  exports.  It  follows  that 
to  give  employment  in  a  new  industry  started  by  a  pro- 
tective tariff,  is  to  take  away  employment  in  production 
of  goods  for  export. 

Even  if  the  people  of  foreign  countries  would  give  us 
our  imports  for  nothing,  —  which  they  will  not,  —  so 
that  our  labor  would  not  need  to  be  employed  in  produc- 
ing goods  to  return  to  them,  still  our  labor  might  be 
sufficiently  employed  in  producing  additional  goods  or 
in  producing  goods  of  a  different  kind  which  we  could 
not  secure  by  gift.  A  high  protective  tariff  would  shut 
out  the  free  goods  and  compel  our  labor  to  be  wasted  in 
producing  these  goods  at  home ;  but  it  would  not  make 
employment  greater  or  more  steady.  Our  labor  would 
simply  be  producing  goods  which  might  have  been  got 
for  nothing,  instead  of  getting  such  goods  free  and  pro- 
ducing additional  goods. 

Labor  can  be  employed,  and  at  high  wages,  when 
there  are  fertile  lands  or  good  sites  to  work  upon,  tools 
to  use,  available  wealth  to  pay  and  support  labor  during 
the  process  of  production  (if  roundabout),  and  a  prospect 
of  a  return  sufficient  to  compensate  for  the  outlay.     A 

'Chapter  IV  (of  Part  II),  §  i. 


124    ECONOMIC  ADVANTAGES  OF  COxMMERCE 

protective  tariff  does  not  increase  or  improve  the  lands 
or  the  sites ;  it  does  not  multiply  tools  or  increase  wealth, 
but  tends  rather  towards  national  poverty ;  it  does  not, 
for  industry  as  a  whole,  improve  the  prospects  for  large 
returns,  but  has,  rather,  the  reverse  effect.1  How,  then, 
can  a  protective  tariff  increase  employment? 

§4 
The  Home  Market  Argument  for  Protection 

In  political  struggle,  it  is  usually  fatal  to  antagonize 
any  very  large  class.  So  in  order  to  carry  through  a 
protective  policy,  it  has  been  necessary,  in  the  United 
States,  to  convince  not  only  wage  workers,  but  farmers  as 
well,  that  the  policy  would  benefit  them.  While  many 
products  of  the  farms,  e.g.  raw  wool,  have  been  protected, 
yet  it  has  been  difficult  to  show  that  the  great  agricul- 
tural staples,  such  as  wheat,  corn,  and  cotton,  have  been 
appreciably  raised  in  price  by  the  tariff  2  or  that  the  tariff 
could  directly  raise  their  prices.  The  appeal  to  American 
farmers  has  therefore  taken  the  form,  in  part,  of  assert- 
ing an  indirect  benefit  of  protection,  through  the  estab- 
lishment of  a  "home  market."  The  "home  market 
argument"  points  out,  to  begin  with,  that  a  protective 
tariff  increases  the  number  of  persons  engaged  in  the 
protected  industries,    e.g.   manufacturing.     Those  thus 

1  The  Arguments  of  Sch  tiller  (Schutzzoll  und  Freihandel,  Vienna  —  Tempsky  — , 
and  Leipzig  —  Freytag — ,1905,  pp.  75-84)  to  the  effect  that  industry  in  any 
country  is  not  rigidly  limited  by  the  factors  of  production,  but  may  vary 
within  wide  limits  in  relation  to  these  factors,  proves  nothing  whatever  for  pro- 
tection, unless  it  is  also  shown  that  industry  is  likely  to  fall  short  of  its  maximum, 
under  free  trade,  and  more  nearly  to  approximate  its  maximum,  under  protec- 
tion. For  such  a  contention  (aside  from  possible  transitional  effects  during 
adjustment  to  a  changed  policy),  there  seems,  to  the  present  writer,  no  reason- 
able justification  either  in  theory  or  in  direct  experience. 

2  See  Ch.  V  (of  Part  II),  §  5. 


SPECIAL  ARGUMENTS  FOR  PROTECTION     125 

led  to  engage  in  manufacturing  then  have  to  buy  the 
products  of  the  farms,  and  so  the  farmers  secure  a  home 
market  for  these  products. 

The  answer  to  such  an  argument  has  already  been 
indicated  in  our  discussion  of  the  effects  of  a  protective 
tariff  on  exports.1  If  we  of  the  United  States  refuse  to 
buy  goods  from  abroad,  and  so  develop  the  production 
of  those  goods  at  home,  to  just  that  extent,  in  the  long 
run,  will  we  be  deprived  of  an  opportunity  to  produce 
goods  profitably  for  export.  The  farmers  can  only  gain 
a  home  market  by  losing  a  foreign  market.  And  the  extra 
prices  they  have  to  pay  for  goods,  especially  protected 
goods,  because  of  the  tariff,  will  cause  them  to  suffer  a 
net  loss. 

Sometimes  the  argument  in  favor  of  the  development  of 
a  home  market  takes  a  slightly  different  form.  Instead 
of  its  being  asserted  that  the  protected  manufacturing 
industries  will  not  exist  or  will  not  be  so  widely  ex- 
tended without  a  tariff,  emphasis  is  placed  on  the  conten- 
tion that  they  will  not  be  so  prosperous.  Those  engaged 
in  them  will  earn  less.  If  the  manufacturing  industries 
are  protected,  it  is  urged,  the  farmers  may,  indeed,  have 
to  pay  more  for  manufactured  goods ;  but  those  engaged 
in  manufacturing  will  then  have  more  money  with  which 
to  purchase  the  farmers'  products,  and  so  the  farmers 
will  get  their  money  back  again.  The  truth  is  that  they 
will  not  and  do  not  get  it  back  again  unless  they  give 
something  else  of  value  in  return.  If  a  farmer  pays  more 
for  clothes,  because  of  a  protective  tariff,  than  he  other- 
wise would,  we  may  admit  that  the  clothes  makers  will 
have  more  money  (other  things  equal)  with  which  to 
buy,  if  they  choose  to,  the  farmer's  products ;    but  the 

>  Chapter  IV  (of  Part  II),  §  i. 


126    ECONOMIC  ADVANTAGES  OF  COMMERCE 

farmer  does  not  get  back  this  extra  money  for  nothing ; 
he  must  give  extra  products  for  it.  To  assume  that  the 
farmer  does  not  have  to  give  extra  products  to  get  back 
the  additional  money  paid  for  the  higher  priced  clothes, 
is  to  assume  that  the  protected  industry  is  not  encour- 
aged by  the  higher  prices  the  farmer  pays  for  its  goods ; 
for  this  is  to  assume  that  the  higher  prices  so  paid  by  the 
farmer  for  the  protected  goods,  are  balanced  by  higher 
prices  which  those  in  the  protected  industry  must  pay 
for  the  farmer's  products.  This  would  mean  no  change 
in  the  relative  positions  of  farmer  and  manufacturers 
because  of  protection,  save  a  merely  nominal  change. 
The  idea  which  protectionists  who  use  this  "get  it  back 
again"  argument  endeavor  to  convey  is  that,  somehow, 
producers  of  protected  goods  get  larger  real  incomes 
because  of  the  tariff ;  while,  at  the  same  time,  those 
whose  purchases  of  goods  at  higher  prices  make  these 
larger  incomes  possible,  lose  nothing  by  the  system. 

The  absurdity  of  such  an  argument  is  perhaps  best 
shown  by  an  illustration.  Suppose  that,  in  a  small  town, 
there  are  a  number  of  robberies,  as  a  result  of  which  each 
of  the  merchants  of  the  town  finds  himself  minus  several 
hundreds  of  dollars.  Finally,  the  thief  is  apprehended. 
But  upon  being  accused  of  his  crimes,  he  asserts  in  his 
own  defence  that  he  has  really  done  no  harm.  Though 
he  admits  having  robbed  the  various  merchants  of 
money,  yet  he  points  out  that  he  has  lived  in  the  town 
and  has  used  all  of  this  money  to  buy  their  goods  and 
that  thus  they  have  "got  it  back  again."  The  obvious 
fact  is,  of  course,  that  the  merchants  have  only  got  their 
money  back  by  giving  up  for  it  other  goods  of  supposedly 
equal  value.1 

1  Cf.  Sumner,  Protectionism,  New  York  (Holt),  1885,  p.  125. 


SPECIAL  ARGUMENTS  FOR  PROTECTION     127 

Protection  may,  as  we  have  seen,1  benefit  one  section 
of  a  country  at  the  expense  of  other  sections;  and  the 
gains  to  the  section  benefited  will  perhaps  be  distributed 
among  all  classes.  If  the  West  and  the  South  are  taxed 
to  develop  manufacturing  in  Rhode  Island,  the  Rhode 
Island  truck  farmers  and  dairymen  may  share  in  the 
local  gains  by  virtue  of  having  a  home  market  provided 
for  them  at  the  expense  of  others.  But  to  say  this  is 
very  different  from  saying  that  they  would  gain  if  the 
local  market  were  provided  entirely  at  their  own  expense. 

§5 

The  Argument  for  Protection  to  Agriculture  in  the  Older 
Countries  against  a  Future  when  Cheap  Foods  and 
Raw  Material  may  not  be  Obtainable  from  the  Newer 
Countries 

An  argument  not  generally  familiar  to  Americans, 
has  been  used  in  favor  of  protection  to  the  agriculture 
of  the  more  crowded  European  countries,  in  particular 
the  agriculture  of  Germany.2  There  is,  it  is  claimed, 
too  great  a  reliance  of  the  older  and  more  densely  settled 
countries  upon  the  new  countries  for  food  supplies  and 
raw  materials.  Eventually  the  new  countries  will  be 
more  thickly  settled,  will,  like  the  old,  devote  themselves 
in  larger  part  to  manufacturing,  and  will  have  smaller 
surpluses  of  food,  etc.,  for  export.  Therefore,  the  old 
and  thickly  settled  countries,  which  will  probably  have 
grown  still  more  in  population  during  the  period  of 
importing  food  and  raw  materials  from  abroad,  will  get 

1  Chapter  V  (of  Part  II),  §  6. 

2  See  Adolph  Wagner,  Agrar-  und  Industriestaat,  Jena  (Gustav  Fischer),  iooi, 
p.  73.  A  good  statement  of  the  argument  is  given  in  Taussig,  Principles  of 
Economics,  New  York  (Macmillan),  191 1,  Vol.  I,  pp.  534.  535- 


128     ECONOMIC  ADVANTAGES  OF  COMMERCE 

their  food  supplies  and  raw  material  with  increasing  diffi- 
culty. The  suggested  remedy  is  that  the  thickly  settled 
countries  should  levy,  each,  a  protective  tariff  on  such 
imports,  force  its  people  to  get  along,  in  the  main,  with 
what  can  be  produced  in  their  own  country,  resist  thus 
the  tendency  to  specialize  in  manufacture,  and  so 
prevent  the  growth  of  a  population  which  is  dependent 
upon  foreign  surpluses  for  its  food  and  necessary  mate- 
rials. 

If  the  fear  is  that  the  new  countries,  when  they  come 
to  develop  manufactures,  will  almost  without  exception 
shut  out,  by  protective  tariffs,  goods  manufactured  in 
the  older  countries,  and  so  eventually  compel  the  latter 
to  be  self-sufficient,  there  is  reason  in  the  suggestion  that 
these  older  countries  remain  self-sufficient  from  the 
beginning.  By  so  doing,  they  will  avoid  the  intense 
suffering  which  must  result  from  a  return  to  a  sparseness 
of  population  capable  of  securing  sufficient  food,  etc., 
at  home. 

But  if  the  world  can  be  expected  to  attain  a  liberal 
attitude  towards  trade,  if  a  tendency  towards  low  tariffs 
can  be  hoped  for  (and  this  is  perhaps  more  likely  to  be 
the  case  as  the  stage  of  infant  industry  is  left  behind), 
then  the  argument  for  protection  of  agriculture  has  very 
little  force.  For  no  matter  how  extensively  the  now 
sparsely  settled  countries  eventually  go  into  manufac- 
turing, they  will  not  go  into  it,  if  not  artificially  encour- 
aged, unless  it  yields,  on  the  average,  as  satisfactory 
returns  as  agriculture.1  That  manufacturing  popula- 
tions in  the  older  countries  will  have  to  meet  the  compe- 
tition of  manufacturing  groups  in  the  newer,  is  true. 
But  assuming  free  trade  (and  if  trade  is  not  free,  then  in 

1  On  the  margin  of  production. 


SPECIAL  ARGUMENTS  FOR  PROTECTION     129 

proportion  as  restrictions  are  slight),  this  merely  means 
that  the  manufacturing  populations  of  the  older  countries, 
cannot  charge  higher  prices  and  therefore  cannot  get 
higher  wages  and  profits  per  unit  product,  than  the  manu- 
facturing groups  in  the  newer  countries.  It  does  not 
mean  that  the  condition  of  the  old  countries  must  be- 
come appreciably  worse  than  that  of  the  new.  So  long 
as  many  persons  in  the  new  countries  care  to  engage  in 
manufacturing  (and  that  they  will  do  so  is  all  that  is 
feared),  it  must  be  that  manufacturing  is  about  as  profit- 
able as  agriculture.  If  it  were  much  less  so,  assuming 
free  trade  or  any  near  approximation  to  free  trade,  the 
newer  countries  would  withdraw  from  manufacturing  and 
the  older  countries  could  carry  it  on  without  competi- 
tion. If  manufacturing  in  the  new  countries  is  as  prof- 
itable as  agriculture,  and  if  trade  is  free,  manufacturing 
in  the  older  countries  (assuming  equal  efficiency)  must 
also  be,  except  for  the  greater  costs  of  transporta- 
tion, as  profitable  as  agriculture  in  the  new,  because  as 
profitable,  save  for  transportation  costs,  as  manufactures 
in  the  new. 

§6 

The  Infant  Industry  Argument  for  Protection 

The  argument  which  is  usually  regarded  by  economists 
as  stating  the  best  case  for  the  protective  tariff,  is  the 
so-called  infant  industry  argument.  The  more  careful 
thinkers  who  advance  this  argument  admit  that  protec- 
tion involves  a  cost,  a  temporary  loss  of  productive  power. 
They  admit  that  it  involves  turning  industry  from  a 
more  productive  into  a  less  productive  line.  But  they 
urge  that  the  newly  established  line  may  be  only  tempo- 
rarily less  productive  and  may  be  eventually  more  pro- 


i3o    ECONOMIC  ADVANTAGES  OF  COMMERCE 

ductive  and  advantageous  for  the  country  than  the 
older  lines  of  industry.  It  is  urged  that  a  country  may 
have  natural  advantages  adequate  to  the  successful 
carrying  on  of  a  given  industry,  but  that,  at  the  begin- 
ning, the  competition  from  more  experienced  manage- 
ment and  better  trained  workmen  abroad  is  likely  to 
prevent  the  growth  and  development  of  the  industry, 
and,  therefore,  to  prevent  the  attainment  of  the  greatest 
possible  efficiency  in  it.  Give  such  an  industry  tempo- 
rary protection,  it  is  said,  so  that  it  can  get  a  start, 
and  it  may  eventually  undersell  its  foreign  rivals.  Then 
the  protectionist  country  will  perhaps  realize  a  gain  which 
will  more  than  compensate  for  the  temporary  loss.1 

It  should  be  said,  to  begin  with,  that  this  argument 
for  protection  applies  at  all,  only  in  regard  to  those 
industries  in  which  success  depends  largely  on  acquired 
skill  and  not  merely  on  natural  advantages.  It  is  hardly 
an  argument,  therefore,  in  favor  of  protection  to  much 
else  than  new  manufactures,  and  it  is  not  an  argument 
in  favor  of  perpetual  protection  for  these.  It  is  highly 
probable,  however,  that  in  some  cases,  if  the  industries 
to  be  protected  are  chosen  wisely,  and  are  not  protected 
too  long,  the  desired  results  can  be  attained.  In  the 
United  States,  a  considerable  part  of  the  silk  industry, 
started  by  protection,  seems  eventually  to  have  reached 
a  position  where  it  can  produce  as  cheaply  as  foreign 
concerns  and  where,  therefore,  it  does  not  need  pro- 
tection.2 

But  while  such  suggestions  have  a  great  deal  of  force, 
the  opposing  considerations,  especially  on  the  practical 

1  This  view  was  presented  in  Alexander  Hamilton's  Report  on  Manufactures, 
and  later,  in  Germany,  was  urged  by  Friedrich  List. 

2  Mason,  "The  American  Silk  Industry  and  the  Tarifl,"  American  Economic 
Association  Quarterly,  December,  igio,  p.  177. 


SPECIAL  ARGUMENTS  FOR  PROTECTION     131 

side,  are  also  not  without  weight.  In  the  first  place, 
though  new  industries  may  indeed  be  developed  in  this 
way,  yet  they  can  be  thus  developed  only  by  drawing  the 
labor  force  required,  from  other  lines.  It  follows  that 
the  development  of  skill  and  the  progress  of  invention 
in  those  other  lines  may  be  retarded  as  much  as  in  the 
new  lines  they  are  forwarded.  New  ideas  are  less  likely 
to  be  evolved  among  a  few  than  among  many.  And  in 
proportion  as  there  are  more  persons  in  the  new  lines,  there 
are  fewer  persons  in  the  old  lines.  Indeed,  it  is  not 
inconceivable  that  some  of  the  older  industries,  indus- 
tries still  capable  of  further  progress,  may  be  made  so 
comparatively  unprofitable  —  especially  if  their  neces- 
sary machinery  or  materials  are  taxed  by  the  tariff  — 
as  to  be  entirely  given  up.  We  have  already  seen  that 
protection  tends  to  decrease  the  export  trade  l  and  that 
it  may,  by  leading  to  rise  of  prices,2  ruin  other  industries.' 
Before,  then,  protection  is  accorded  to  an  infant  or  em- 
bryonic or  projected  industry,  inquiry  should  be  made 
as  to  the  following  points :  first,  as  to  whether  that 
industry  can  be  expected  to  develop  without  such  aid ; 
second,  as  to  whether,  if  it  will  not,  such  aid  will  suffice 
to  develop  it  to  a  point  where  it  can  and  will  sell  its 
products  more  cheaply  than  they  can  probably  be  secured 
elsewhere,  and  enough  more  cheaply  to  compensate,  with 
interest,  for  the  loss  incident  to  starting  it ;  third,  as  to 
whether  the  attempt  to  encourage  it  might  not  involve 
a  risk  of  discouraging  other  industries,  which  would 
balance  any  hoped-for  gain. 

In  view  of  all  these  considerations,  it  becomes  impor- 

1  Chapter  IV  (of  Part  II),  §  i. 

2  Or  a  change  in  value  relations  of  money  systems,  which  acts  similarly. 

3  Chapter  IV  (of  Part  II),  §  6. 


i32     ECONOMIC  ADVANTAGES  OF  COMMERCE 

tant  to  judge  the  fitness  of  the  governing  body  to  apply 
such  a  policy,  decide  upon  its  effects,  and  select  the 
industries  to  be  encouraged.1  It  is  a  special  function  of 
the  enterpriser-capitalist  to  select  for  his  own  investment 
(and  the  investments  of  those  whom  he  influences)  indus- 
tries capable  of  succeeding.  If  he  does  not,  the  principal 
loss  falls  upon  him  and  upon  others  in  like  situation.  The 
community  suffers  only  indirectly  and  incidentally. 
The  enterpriser-capitalist  is  a  product  of  selection. 
His  power  to  direct  industry  into  profitable  chan- 
nels is  due  to  his  possession  of  capital,  or  the  confidence 
of  other  business  men  and  investors,  or  both.  His  pos- 
session of  capital  and  of  this  confidence,  though  some- 
times due  in  part  to  inheritance  from  able  progenitors 
or  relatives,  is  frequently  due,  in  no  small  degree,  to  past 
successes.  He  has  the  power  to  direct  industry  into  those 
lines  which  he  believes  will  pay  best  and  which,  there- 
fore, are  presumably  the  lines  most  needed  by  the  com- 
munity, because  he  has  successfully  so  directed  industry 
in  the  past.  Men  whose  knowledge  of  law  or  politics 
has  made  them  members  of  a  law-making  body  are  not, 
as  a  rule,  the  product  of  the  same  kind  of  selection.  If 
they  were,  the  fact  that  their  own  fortunes  are  not  at 
stake  does  not  conduce  to  caution.  In  case  a  new 
industry  established  by  protection  never  becomes 
profitable,  the  loss  which  its  establishment  causes  falls 
upon  the  general  public  and  not  upon  legislators  as  such. 
Similarly,  in  case  an  industry  is  prematurely  established 
or  in  case  its  establishment  retards  other  industries,  the 
loss  is  that  of  the  public. 

Given  the  present  form  of  our  own  and  other  republican 

1  Cf.  Bastable,   The  Theory  of  International  Trade,  fourth  edition,  London 
(Macmillan),  1903,  p.  140. 


SPECIAL  ARGUMENTS  FOR  PROTECTION     133 

governments,  there  is  a  special  pressure  tending  towards 
unwise  selection  of  lines  to  be  favored.  This  is  the  pres- 
sure of  localities  or,  at  least,  of  large  interests  in  various 
localities.  For  in  republican  government,  legislators 
usually  represent  districts,  states,  or  other  territorial 
units.  When  it  is  proposed  to  encourage  various  indus- 
tries, when  the  idea  of  protection  is  politically  dominant, 
many  and  influential  interests  in  each  state  and  district 
are  likely  to  desire  that  the  industries  of  that  state  and 
district  shall  get  such  help  at  the  general  expense.  The 
tariff  eventually  decided  upon,  the  tariff  to  which  legis- 
lators from  different  sections  can  agree,  is  not  likely  to 
be  one  which  even  attempts,  scientifically,  to  apply  the 
theory  of  infant  industry  protection.  Instead,  it  is 
likely  to  be  a  hodge-podge  of  special  favors,  distributed  ac- 
cording to  the  relative  strength  of  conflicting  interests,  and 
bringing  general  and  long-continued  injury  to  the  public. 
The  longer  such  a  system  continues  and  the  more 
extensive  its  application,  the  greater  are  the  difficulties 
in  the  way  of  its  reform.  More  and  more  industries 
are  built  up  by  tariff  barriers,  and  their  owners  and  work- 
men taught  to  rely  upon  these  barriers  for  protection 
against  foreign  rivalry.  Managerial  effort,  which  might 
otherwise  be  devoted  to  development  of  the  highest 
efficiency,  is  instead  devoted  to  the  exertion  of  political 
pressure.  Every  effort  is  made  by  numerous  interested 
persons  to  retain  and  increase  the  favors  secured.  Those 
engaged  in  the  industries  assisted  are  seldom  ready  to 
consent  to  reduction  of  the  tariff  after  a  period  of  favor- 
itism, however  long,  but  endeavor,  usually,  to  keep  the 
protection  indefinitely.  Proposals  for  reduction  are 
met  by  predictions  of  dire  calamity,  and  strong  opposi- 
tion to  reduction  is  thus  aroused. 


134    ECONOMIC  ADVANTAGES  OF  COMMERCE 

To  the  suggestion  that  protected  industries  might 
decline  and  die  without  protection,  the  answer  has  been 
made  that  "no  industry  will  ever  be  given  up  except  in 
order  to  take  up  a  better  one,  and  if,  under  free  trade, 
any  of  our  industries  should  perish,  it  would  only  be 
because  the  removal  of  restrictions  enabled  some  other 
industry  to  ofler  so  much  better  rewards  that  labor  and 
capital  would  seek  the  latter." *  There  is  doubtless 
reason  in  the  contention  that,  since  many  persons  have 
invested  capital  in  the  protected  industries  and  since 
many  others  have  acquired  skill  not  equally  useful  in 
other  lines,  relying  upon  a  continuance  of  the  past  policy 
of  our  government,  therefore  the  entire  protective  system 
should  not  be  swept  away  with  one  blow.  Time  should 
be  given  (as,  under  the  tariff  reduction  policy  of  the  present 
administration  at  Washington,  it  is  being  given)  for  ad- 
justment to  new  conditions.  Nevertheless,  the  public 
cannot  be  held  to  have  pledged  itself  or  to  be  under  any 
obligation  to  maintain  indefinitely  the  protective  system. 
Producers  must  be  held  to  have  taken  the  risk  of  change, 
knowing  eventual  removal  of  tariff  duties  to  be  the 
public's  privilege.  Because  the  people  have  been  will- 
ing to  pay  higher  prices  for  goods  during  a  limited 
period,  it  does  not  follow  that  they  are  duty  bound  to 
suffer  an  equivalent  annual  loss  through  all  future  time. 

§7 

The  Argument  that  a  Protective  Policy  should  be  Fol- 
lowed in  Order  to  Diversify  Industry 

It  is  also  sometimes  argued  that  protection  is  of  use 
to  diversify  industrial  activity  within  a  country.     We 

1  Sumner,  Protectionism,  p.  130. 


SPECIAL  ARGUMENTS  FOR  PROTECTION     135 

have  already  seen  that,  while  the  protective  policy 
encourages  protected  industries,  it  may  cause  the 
decline  of  others.  Yet  if  applied  carefully  and  consist- 
ently with  the  object  of  diversification  in  view,  it  is 
probable  that  a  high  tariff  would  increase  the  number 
of  industries  carried  on. 

It  does  not  follow  that  prosperity  would  be  increased. 
There  is  no  special  advantage  in  having  a  larger  number 
of  occupations  carried  on  when  the  average  income  is 
reduced  by  having  them.  As  a  matter  of  fact,  a  large 
country  like  the  United  States,  with  a  wide  range  of 
natural  resources  and  a  versatile  population,  would  be 
certain  to  have  diversified  industry  within  its  borders, 
under  either  protection  or  free  trade.  With  its  mines 
of  coal,  iron,  copper,  etc.,  the  United  States  could  hardly 
fail  to  be  not  alone  an  agricultural  country,  but  a  manu- 
facturing country  as  well. 

§8 

The  Argument  that  Protection  should  be  Applied  as  a 
Means  of  Getting  and  Maintaining  a  Certain  Degree  of 
National  Self-sufficiency 

Not  all  of  the  arguments  for  a  protective  tariff  are 
strictly  economic  in  character.  There  is,  for  instance, 
the  argument  that  protection  should  be  used  to  insure 
national  self-sufficiency.  This  argument,  in  so  far  as 
it  carries  great  weight,  is  of  a  military  significance.  It 
is  urged  that  a  country  at  war  with  another  or  others, 
is  likely  to  have  its  foreign  trade  seriously  interfered 
with.1     If  the  country  in  question  has  relied  on  foreign 

1  It  may,  of  course,  be  interfered  with  to  some  extent  if  another  country  or 
other  countries,  with  which  it  habitually  trades,  are  at  war.  But  only  a  part 
of  its  foreign  commerce  is  likely,  in  that  case,  to  be  affected. 


136    ECONOMIC  ADVANTAGES  OF  COMMERCE 

trade  for  the  necessaries  of  life,  it  will  be  subject  to  a 
considerable  strain  during  the  war  period,  and  perhaps 
will  be  less  able  to  carry  the  contest  to  a  successful  con- 
clusion. If  it  has  relied  upon  foreign  trade  for  firearms 
and  ammunition,  it  may  be  in  no  better  position.  It  is 
asserted,  therefore,  that  a  country  should  adopt  the 
policy  of  producing  all  necessaries,  including  all  things 
required  for  war  purposes,  within  its  own  borders,  even 
though  to  do  this  brings  economic  loss. 

It  must  be  admitted  that  this  argument,  like  the  argu- 
ment for  protection  to  infant  industries,  is  not  without 
claims  to  a  respectful  hearing.  There  are,  however, 
some  considerations  of  importance  on  the  other  side. 
In  the  first  place,  close  trade  relations,  such  as  are 
more  likely  to  follow  from  a  free  trade  or  from  a  low  tariff 
policy  than  from  protection,  do  much  to  promote  inter- 
national good  feeling  and,  therefore,  to  prevent  the 
occurrence  of  war.  And  in  the  second  place,  even  if 
war  does  occur,  it  may  well  be  that  the  larger  wealth  and 
population  made  possible  by  a  liberal  trade  and  tariff 
policy  will  give  greater  military  strength,  through  the 
larger  fighting  force  which  can  thus  be  supported,  than 
would  any  degree  of  national  self-sufficiency.1 

In  this  connection  we  may  cite  the  case  of  Great 
Britain.  If  national  self-sufficiency  is  imperative,  there 
would  seem  to  be  nothing  which  it  would  be  more 
important  to  produce  in  the  home  country  than  food. 
Had  Great  Britain  persisted  in  a  policy  of  excluding  for- 
eign grain  and  compelled  her  people  to  live  upon  what 
they  could  themselves  produce,  she  would  have  been 
aiming  at  this  ideal  of  self-sufficiency.  Had  Great 
Britain  carried  out  such  a  policy,  however,  her  population 

1  Sumner,  Protectionism,  p.  143. 


SPECIAL  ARGUMENTS  FOR  PROTECTION     137 

could  not  have  become  so  great  by  many  millions  as  it 
has,  nor  could  her  wealth  have  become  so  great.  She 
has  chosen  rather  to  specialize  in  production,  to  import 
foodstuffs,  to  attain  a  numerous  population  and  large 
wealth.  She  is  not,  it  is  true,  self-sufficient  in  time  of 
war.  She  must  rely  for  her  food  upon  lands  across  the 
seas.  But  the  wealth  which  a  free  trade  policy  has 
brought  her  makes  possible  the  maintenance  of  the  most 
powerful  navy  in  the  world,  a  navy  by  means  of  which 
her  commerce  is  protected.  Is  England  not  a  stronger 
nation,  a  richer  nation,  and  a  not  less  independent  and 
happy  nation,  than  she  could  have  been  had  the  contrary 
policy  been  followed  ? 

§9 

Free  Trade  within  the  United  States 

With  the  exception  of  political  or  military  arguments, 
practically  every  consideration  advanced  in  favor  of 
tariff  duties  on  goods  produced  in  foreign  countries, 
could  be  urged  with  no  less  (and  no  greater)  plausibility 
in  favor  of  tariff  duties  levied  by  one  State  or  section 
on  goods  produced  in  another  State  or  section.  Is  it 
suggested  that  we  do  not  wish  to  send  money  out  of  the 
country  and  that  to  do  so  makes  us  poorer  ?  An  exactly 
parallel  argument  would  assert  that  we  should  adopt 
measures  to  keep  money  from  being  sent  out  of  the  State 
or  the  county.  Do  stanch  protectionists  tell  us  that 
to  let  goods  come  in  from  abroad  at  low  prices,  must 
lower  American  wages  ?  If  so,  then  for  Ohio  or  Illinois 
to  let  low-priced  goods  be  imported  from  New  York  or 
from  Pennsylvania,  must  tend  to  make  wages  in  Ohio 
and  Illinois  lower  than  they  otherwise  would  be.  If 
to  shut  out  English  goods  from  the  United  States  makes 


138     ECONOMIC  ADVANTAGES  OF  COMMERCE 

additional  employment  for  American  wage  earners, 
then  to  shut  out  Connecticut  goods  from  Rhode  Island 
must  make  additional  employment  for  Rhode  Island 
wage  earners.  It  is  hardly  necessary  to  pursue  the  com- 
parison further.  Carried  to  its  logical  conclusion,  the 
system  of  protection  would  prohibit  all  trade  and,  there- 
fore, all  the  gain  in  wealth  which  flows  from  trade. 

Fortunately,  the  Federal  Constitution  makes  tariff 
barriers  between  the  different  states  of  the  United 
States  impossible.  If  it  did  not,  we  should  doubtless 
find  some  of  our  states  levying  protective  duties  against 
their  neighbor  states,  as  Massachusetts,  New  York,  and 
Pennsylvania  did  under  the  old  Confederation  of  1781.1 
As  it  is,  trade  between  the  states  is,  for  the  most  part, 
regarded  with  equanimity.  The  coal  of  Pennsylvania 
is  exchanged  for  the  shoes,  woolen  and  cotton  goods, 
clocks,  etc.,  of  Massachusetts,  Connecticut,  and  other 
New  England  States.  The  wheat,  corn,  and  meat  of 
the  Middle  West,  and  the  cotton,  rice,  and  sugar  of  the 
South,  are  sold  throughout  the  country,  and  the  special 
products  of  other  sections  are  given  in  payment.  When 
improvements  in  transportation  facilities  make  low 
transportation  rates  possible,  we  regard  the  consequent 
reductions  as  cause  for  rejoicing,  because  of  the  stimulus 
thus  given  to  trade.  There  is  no  reasonable  doubt  that 
free  trade  within  the  borders  of  the  United  States  adds 
greatly  to  our  national  prosperity  and  adds,  also,  to  the 
prosperity  of  each  separate  state.  To  widen  this  free 
trade  area,  so  far  as  lies  within  our  power,  would  still 
further  increase  our  economic  welfare. 

1  Hart,  Essentials  in  American  History,  New  York  (American  Book  Co.), 
1005,  P-  199- 


SPECIAL  ARGUMENTS  FOR  PROTECTION     139 

§  10 

Ethical  Considerations  Bearing  on  the  Policy  of  Protection 

Before  concluding  this  discussion  of  the  high  tariff 
system,  let  us  consider  briefly  the  moral  issues  involved. 
The  maintenance  of  this  system  means  that  wealth  is 
to  be  gained,  in  the  favored  industries,  not  by  serving 
the  public  well,  not  by  giving  to  the  public  better  goods 
than  could  otherwise  be  secured  or  goods  at  lower  prices 
than  must  otherwise  be  paid,  but  by  depriving  the 
public,  through  influence  on  legislation,  of  such  benefits. 
The  maintenance  of  protection  means  that  political 
influence  calculated  to  injure  the  community  will  often 
bring  larger  returns  to  those  who  wield  it  than  would 
business  carried  on  in  rivalry  with  others  for  the  benefit 
of  the  community.  As  a  consequence,  energies  which 
might  be  devoted  wholly  to  legitimate  business,  that  is, 
to  seeking  profit  through  efficient  service,  spend  them- 
selves instead  in  selfish  political  activity,  in  the  attempt 
to  make  impossible  any  rivalry  in  service  from  foreign 
producers,  in  the  attempt  to  force  higher  prices  from  con- 
sumers, and  so  to  realize,  at  the  expense  of  consumers, 
higher  profits  than  are  earned.  If  the  ideal  of  industrial 
morality  is  that  profit  shall  be  in  proportion  to  service, 
if  to  seek  profit  by  disservice  is  immoral,  then  the  selfish 
attempt  of  private  interests  to  realize  wealth  by  arbi- 
trarily shutting  out  foreign  competitors  through  tariff 
restrictions,  like  the  attempt  to  shut  out  domestic 
competitors  through  seeking  railroad  discriminations, 
violates  this  ideal  and  is  immoral. 


i4o    ECONOMIC  ADVANTAGES  OF  COMMERCE 

§n 

Summary 

In  this  chapter  the  attempt  has  been  made  properly 
to  estimate  the  value  of  most  of  the  standard  arguments 
for  protection.  The  argument  that  protection  increases 
national  prosperity  by  getting  and  keeping  more  money 
in  circulation  in  the  protectionist  country  was  shown 
to  be  fallacious,  since  money  is  not  the  ultimate  or  prin- 
cipal end  of  trade.  The  popular  "wages  argument"  for 
protection,  so  much  used  in  political  campaigns,  was 
shown  to  have  little  better  basis.  Money  wages  tend 
to  be  somewhat  higher  because  of  the  tariff,1  but  real 
wages  are  almost  necessarily  lower.  The  much  feared 
"competition  of  cheap  foreign  labor"  is  beneficial  to 
our  wage  earners  when  it  means  cheap  goods  from  abroad, 
and  is  injurious  to  our  wage  earners  only  when  it  means 
immigration  of  this  cheap  labor.  Those  who  attempt 
to  show,  inductively,  e.g.  by  comparison  of  English  and 
American  wages,  that  protection  makes  wages  higher, 
fail  to  take  other  things,  such  as  relative  density  of 
population,  into  account.  The  argument  that  pro- 
tection increases  the  opportunities  for  employment  was 
likewise  shown  to  be  untenable.  It  increases  employ- 
ment in  any  industry  only  by  making  that  industry  more 
profitable.  But  in  so  doing  it  makes  other  industries 
less  profitable.  Natural  resources  and  accumulated 
capital,  which  make  employment  at  remunerative 
wages  possible,  are  not  increased  by  protective  tariffs. 

The  third  argument  considered  was  the  so-called 
"  home  market"  argument.     This  is  one  of  the  principal 

1  Except,  of  course,  in  the  case  of  unrelated  currencies.  See  Ch.  V  (of  Part 
ID,  5  3- 


SPECIAL  ARGUMENTS  FOR  PROTECTION     141 

arguments  by  which  the  farmers'  votes  are  sought  for 
the  protective  policy.  Examination  showed  that  the 
gaining  of  a  home  market  by  protection  involves  the 
losing  of  a  foreign  market  in  whole  or  in  part,  and  that 
the  higher  prices  which  protection  makes  farmers  pay  for 
goods  are  not  compensated  for  by  the  fact,  supposing  it 
to  be  a  fact,  that  those  to  whom  the  money  is  paid  have 
more  money  with  which  to  buy  farm  produce. 

An  argument  having,  if  convincing,  more  significance 
at  present  for  Europeans  than  for  Americans,  is  that  in 
favor  of  protection  to  agriculture,  as  security  against 
a  time  when  the  newer  countries  may  be  less  inclined 
to  buy  manufactured  goods  of  and  sell  food-stuffs,  etc., 
to  the  older  ones.  We  saw,  however,  that  if  future  trade 
is  unimpeded  or  is  impeded  only  by  low  tariffs,  the 
older  countries  can  always  have  a  market  for  their  manu- 
factures without  having  to  accept  returns  less  by  much 
more  than  necessary  transportation  costs,  than  those  of 
manufacturing  industries,  and,  therefore,  agriculture, 
in  the  more  largely  agricultural  countries.  Unless  great 
restrictions  on  future  trade  are  feared,  this  argument  for 
protection  to  agriculture  has  little  force. 

Protection  to  infant  industries  has  been  urged,  even 
by  some  careful  thinkers,  as  a  desirable  temporary  policy. 
The  principal  objections  are  practical.  It  is  difficult 
to  be  certain  that  the  development  of  other  industries 
is  not  being  hindered  as  much  as  that  of  the  favored  in- 
dustry is  being  helped.  It  is  difficult  to  be  certain  that 
the  protected  industry  will  eventually  reach  a  point  of 
development  such  that  the  cheapness  of  its  products  will 
repay  the  public  for  the  admitted  temporary  loss.  It  is 
doubtful  if  a  legislative  body  is  usually  competent  to 
select  industries  for  protection,  on  this  principle,  and  it 


142     ECONOMIC  ADVANTAGES  OF  COMMERCE 

is  probable  that,  in  practice,  political  pressure  from 
interested  parties  in  various  localities  will  play  much  too 
great  a  part.  There  is  danger  that  the  temporary  pro- 
tection will  be  continued  much  longer  than  is  necessary 
or  desirable,  since  its  beneficiaries  seldom  want  to  give 
it  up. 

Protection  is  also  urged  as  a  means  of  diversifying 
industry,  and  it  probably  has  somewhat  this  effect.  Yet 
diversification  can  be  purchased  at  too  great  a  cost. 
And  a  large  country,  with  varied  resources,  is  pretty 
sure  of  a  considerable  diversity  of  industry,  even  without 
protection. 

The  argument  for  protection  to  insure  national  self- 
sufficiency  is,  in  the  main,  a  military  argument.  Na- 
tional self-sufficiency  is  undoubtedly  an  advantage  in 
time  of  war.  So  is  large  population  and  great  wealth. 
Protection  tends  to  increase  the  degree  of  self-sufficiency 
and  to  limit  wealth  and  (consequently)  population.  It 
cannot  be  definitely  asserted,  therefore,  that  protec- 
tion has  often  an  adequate  military  justification.  The 
greater  wealth  and  population  resulting  from  a  free  trade 
policy  may  mean  the  possibility  of  a  larger  army  and 
navy  and  a  greater  safety  from  attack. 

Most  of  the  arguments  for  protective  tariffs  on  foreign 
produced  goods  (though  not,  of  course,  the  military  argu- 
ment) might  be  used  with  equal  plausibility  in  favor  of 
protection  by  one  part  of  a  country  against  goods  pro- 
duced in  another  part.  It  is  generally  taken  for  granted, 
however,  at  least  in  the  United  States,  that  free  intra- 
national trade  brings  benefit  to  each  separate  state  or 
other  section  of  the  country.  If  so,  free  trade  with  for- 
eign countries  would,  in  the  same  way,  bring  gain  to  the 
nation  as  a  whole. 


SPECIAL  ARGUMENTS  FOR  PROTECTION     143 

The  industrial  and  commercial  ideal  is  that  wealth 
shall  be  gained  by  service  to  the  community  and  not  by 
injuring  the  community.  Tested  by  this  ideal,  the  effort 
of  interested  parties  to  get  protection  for  their  industries 
is  morally  wrong.  For  they  are  endeavoring  to  gain  busi- 
ness and  wealth  by  prohibiting  a  foreign  competition 
beneficial  to  the  public,  instead  of  by  serving  the  public 
better  than  do  their  foreign  rivals. 


CHAPTER  VII 

The  Nature  and  Effects  of  Bounties 

Bounties  as  Compared  and  Contrasted  with  Protection 

Somewhat  similar  in  principle  to  an  import  protective 
tariff  is  a  bounty.  A  bounty  is  a  payment  made  at 
intervals  by  government  to  the  persons  engaged  in  some 
industry  which  it  is  desired  to  encourage,  in  proportion 
to  the  quantity  of  goods  turned  out  or  sold  or  in  proportion 
to  the  quantity  exported.  The  purpose  is,  or  purports 
to  be,  the  encouragement  and  development  of  the  industry 
receiving  the  periodic  payment.  A  bounty  is  like  pro- 
tection in  that  it  tends  to  divert  industrial  activity  into 
a  different  line  or  lines  than  such  activity  would  other- 
wise follow.  Thus,  to  use  our  previous  illustration, 
Canada  could,  by  means  of  a  bounty  as  well  as  by  pro- 
tection, encourage  Canadian  production  of  linen.  The 
beet  sugar  industry  in  continental  Europe  has  been, 
largely,  so  encouraged.  Likewise,  by  means  of  bounties 
or  so-called  shipping  subsidies,  a  number  of  countries 
have  endeavored  to  build  up  their  shipping  interests.1 

On  the  other  hand,  the  bounty  differs  in  several  re- 
spects, in  its  application,  from  protection.  To  begin 
with,  a  protective  tariff  encourages  an  industry  by  guar- 
anteeing it  the  home  market,  i.e.  by  shutting  out  goods 
from  abroad.     But  a  bounty  does  not  attempt  to  inter- 

1  See  discussion  of  shipping  subsidies  in  Ch.  VIII  (of  Part  II),  §  2. 
144 


THE  NATURE  AND  EFFECTS  OF  BOUNTIES     145 

fere  with  foreign  competition.  It  endeavors,  rather, 
to  enable  the  home  producer  more  easily  to  meet  foreign 
competition.1  The  one  method,  protection,  directly 
shuts  out  rivals.  The  other  method  provides  home 
producers  with  the  means  to  drive  out  rivals. 

It  follows,  as  a  second  and  related  distinction,  that, 
while  a  protective  tariff  enables  the  protected  producers 
to  charge  more  for  their  goods,  a  bounty  puts  the  favored 
producers  in  a  position  to  sell  their  goods  for  less  than 
they  could  otherwise  afford  to  take.2  It  is  thus  that 
these  producers  are  enabled  to  capture  the  business. 
A  bounty  may,  because  of  this  difference  from  protec- 
tion, divert  industry  out  of  its  natural  channels  to  a 
greater  degree  than  a  protective  duty.  For  the  latter 
can  do  no  more  than  guarantee  the  home  market  to  pro- 
ducers who,  since  they  need  protection  at  home,  are 
unlikely  to  get  any  considerable  business  elsewhere; 
and  in  fact,  protection,  by  causing  inflow  of  money  and 
higher  money  costs,  is  likely  to  have  the  effect  of  making 
invasion  of  foreign  markets  more  difficult  than  before. 
But  the  former,  a  bounty,  may  make  it  possible  for  an 
industry,  through  competition  in  lower  prices,  to  capture 
the  markets  of  the  world,  though  very  probably  at  great 
expense  to  the  taxpayers  of  the  bounty-paying  country. 

Third,  the  burden  of  protection  falls  upon  the  buyers 
of  protected  goods  in  proportion  to  their  purchases  of 
these  goods;  while  the  burden  of  a  bounty  falls  upon 
taxpayers  in  proportion  to  their  respective  contributions 
to  the  tax  fund.  Protection  compels  consumers  to  pay 
higher  prices.  A  bounty  compels  citizens  to  pay  higher 
taxes. 

1  Cf.  R.  Meeker,  History  of  Shipping  Subsidies  (in  Publications  of  the  Ameri- 
can Economic  Association,  August,  1905),  p.  172. 

2  Cf.  ibid.,  p.  173- 

PART  11  —  L 


146     ECONOMIC  ADVANTAGES  OF  COMMERCE 

§2 

The  Various  Possible  Effects  of  Bounties  on  the  Level  oj 

Prices 

The  effect  of  a  bounty  on  the  general  level  of  money 
prices  in  the  bounty-paying  country  is  similar  to  that 
of  protection.  We  may,  for  the  purposes  of  our  discus- 
sion, distinguish  three  cases.  In  the  first  case,  the 
bounty  acts  like  a  protective  tariff  in  that  it  decreases 
imports.  Thus,  Canada  might  have  a  bounty  of  43 
cents  a  yard  or  slightly  more,  on  linen  cloth,  which  would 
enable  the  Canadian  cloth  producers  to  sell  at  home  for 
$1  or  slightly  less  a  yard,  instead  of  $1.43.  As  a  conse- 
quence, we  may  suppose,  the  Canadian  cloth  producers 
would  be  able  to  get  complete  control  of  the  home  market. 
Then,  as  in  the  case  of  protection,  no  money  would  flow 
to  Ireland  or  elsewhere,  for  linen.  But  foreign  con- 
sumers would  still  buy  Canadian  wheat,  and  there  would 
be  a  tendency  for  prices  in  general,  in  Canada,  including 
the  price  of  linen,  to  rise.1  Eventually  Canadian  prices 
would  be  enough  higher  than  before,  as  compared  with 
foreign  prices,  to  bring  back  equilibrium  in  trade.  If 
Canada's  currency  system  were  unrelated  to  the  systems 
of  other  countries,  if,  for  example,  it  were  based  on  incon- 
vertible paper,  the  rise  of  money  prices  would  not  take 
place,  but  equilibrium  of  trade  would  eventually  result 
through  a  change  in  the  relative  values  of  Canadian  and 
other  currencies.2 

In  the  above  assumed  case,  we  have  supposed  a  bounty 
not  quite  high  enough  to  make  it  easy  or  perhaps  possible, 

xThis  might  lead,  as  in  the  case  of  protection,  to  a  demand  for  a  greater 
bounty,  or  to  a  demand  for  bounties  to  industries  previously  not  encouraged 
See  Ch.  IV  (of  Part  II),  §  6. 

»  See  Part  I,  Ch.  VI,  §§  6,  7,  8,  g,  and  Part  II,  Ch.  IV,  &  3. 


THE  NATURE  AND  EFFECTS  OF  BOUNTIES     147 

for  Canadian  linen  producers  to  meet  transportation  costs 
and  invade  foreign  markets.  Let  us  now  suppose  a 
bounty  of  60  cents  a  yard.  With  a  production  cost  of 
$1.43,  this  bounty  would  reduce  the  net  cost  to  83  cents 
a  yard.  Even  after  paying  transportation  costs,  Cana- 
dians could  then  perhaps  sell  linen  abroad  for  85  or  90 
cents  a  yard,  thus  greatly  increasing  their  business  and 
driving  out  foreign  competitors.  In  this  case,  not  only 
would  Canadian  importation  of  linen  be  decreased,  but 
Canadian  exportation  of  linen  would  be  greatly  increased. 
As  a  consequence,  there  would  be  a  net  inflow  of  money 
into  Canada  and  a  relative  rise  of  Canadian  prices.  This 
rise  would  continue  until  equilibrium  became  estab- 
lished either  by  larger  purchases  of  Canadians  abroad, 
or  by  smaller  purchases  of  foreigners  in  Canada,  or  by 
both.  Thus,  Canadians  might  even,  if  prices  should 
rise  sufficiently,  buy  goods  abroad  which  they  had  pre- 
viously produced  at  home.  If  so,  other  Canadian  pro- 
ducers would  clamor  for  bounties  or  for  protection. 
Nevertheless,  an  equilibrium  of  trade  must  eventually  be 
established.1 

The  third  case  would  be  realized  if,  at  the  time  of  es- 
tablishing a  bounty  on  linen  manufacture,  Canada  was 
already  largely  supplying  the  world  with  linen  and  could 
not  hope  greatly  to  extend  her  foreign  market.  In  this 
case,  the  effect  of  the  bounty  (assuming  free  competition 
among  present  and  potential  Canadian  linen  producers) 
would  be  to  lower  the  price  of  linen  without  correspond- 
ingly increasing  its  sale.  Less  money  would  therefore 
flow  into  Canada,  while  as  much  as  before  would  flow 
out.  Other  things  equal,  there  would  be  a  net  outflow 
of  money,  and  money  prices  would  fall.     It  hardly  needs 

1  Cf.  Ch.  IV  (of  Part  II),  §  6. 


148     ECONOMIC  ADVANTAGES  OF  COMMERCE 

to  be  stated  that,  if  Canada's  money  system  is  assumed 
to  be  different  from  those  of  other  countries,  there  would 
be  a  change  in  the  value  of  Canadian  money  in  terms  of 
other  money,  rather  than  a  fall  in  Canadian  prices.1 

§3 

The  Various  Possible  Effects  of  Bounties  on  the  General 
Welfare  in  the  Bounty-paying  Country  and  in  the 
Countries  with  which  it  Trades 

Consideration  of  the  effects  of  a  bounty  on  the  general 
welfare  of  the  bounty-paying  country  and  of  the  countries 
with  which  it  trades,  may  profitably  follow  the  line  of 
the  above  three  cases.  In  the  first  case,  where  it  decreases 
imports  by  enabling  the  home  producers  to  gain  the  home 
market  buj:  does  not  enable  them  to  gain  a  foreign 
market,  the  bounty  acts  substantially  like  a  protective 
tariff.  It  tends  to  prevent  imports  but  not  to  stimulate 
exports.  It  conduces  to  national  self-sufficiency.  It 
prevents  what  would  else  be  a  profitable  trade.  Like 
protection,  it  turns  labor  and  capital  away  from  the  chan- 
nels they  would  naturally  follow,  away  from  what  are 
presumably  the  most  profitable  channels,  into  channels 
favored  by  law.  The  effects  on  total  production  are 
obviously  the  same,  whether  diversion  is  caused  by  pro- 
tection or  by  bounty. 

Not  only  is  the  bounty-paying  country  injured,  but 
also  the  countries  with  which  it  trades  are,  presumably, 
to  some  extent  injured.  These  other  countries  lose  a 
profitable  export  trade,  and  they  do  not  secure  goods 
more  cheaply  from  the  bounty-paying  country  since  the 
bounty  is  not  high  enough,  in  the  first  case  discussed, 

1  See,  particularly,  Part  I,,Ch.  VI,  §§  6,  7,  8. 


THE  NATURE  AND  EFFECTS  OF  BOUNTIES     149 

to  encourage  sales  abroad  by  the  recipients  of  this 
bounty. 

The  second  case  to  be  considered  is  that  in  which  the 
bounty  encourages  export  by  the  bounty-paying  country, 
of  the  goods  on  which  the  bounty  is  paid.  If  desired, 
the  bounty  may  be  paid  only  on  exported  goods.  In 
this  second  case,  as  in  the  first,  the  prosperity  of  the 
bounty-paying  country  is  made  less  than  it  otherwise 
might  be.  Industry  is  turned  from  more  profitable 
into  less  profitable  channels.  Trade  with  other  coun- 
tries is  not  prevented  to  the  extent  that  it  is  in  the  first 
case  or  in  the  case  of  protection,  and  may  be  actually 
increased.  But  the  trade  stimulated  is  not  relatively  a 
profitable  trade.  The  export  of  linen  by  Canada,  in 
our  illustration,  takes  the  place  of  other  exportation  more 
profitable  to  Canada  or  of  internal  trade  which  would 
be  more  profitable.  It  is  as  uneconomical  to  encourage 
a  trade  which  would  not  otherwise  take  place,  as  to  dis- 
courage, by  protection  (or  by  high  export  taxes),  trade 
which  otherwise  would  take  place. 

The  effect  of  the  bounty  on  other  countries  than  the 
one  which  pays  it,  is,  in  this  second  case,  beneficial. 
We  know  that  other  countries  would  gain  by  the  trade 
if  the  new  industry  were  one  which  became  established 
in  the  bounty-paying  country  because  of  suddenly  dis- 
covered natural  resources  or  because  of  acquisition  of 
skill.  And  as  far  as  other  countries  are  concerned, 
the  bounty  has  the  same  effect  as  either  of  these  other 
causes  of  development  of  the  favored  industry.  It  is 
no  longer  desirable  for  them  to  produce  the  goods  in 
question  for  themselves.  These  goods  can  be  got  more 
cheaply  at  the  expense  of  the  taxpayers  of  the  bounty- 
paying  country.     The  persons  in  other  countries,  who 


150    ECONOMIC  ADVANTAGES  OF  COMMERCE 

formerly  produced  these  goods,  must,  it  is  true,  change 
their  occupation.1  But  there  are  presumably  other 
occupations  equally  or  almost  equally,  profitable,  and  the 
consumers  of  these  other  countries  gain,  therefore,  more 
than  the  producers  lose.2 

In  the  third  case,  the  bounty  does  not  appreciably 
increase  the  sales  abroad  by  the  favored  producers  of  the 
bounty-paying  country,  but  simply  results  in  their  selling 
about  the  same  quantity  of  their  goods  at  lower  prices. 
In  this  case,  the  loss  to  the  bounty-paying  country  is 
more  obvious  than  in  the  other  cases,  while  it  is  even 
clearer  than  in  the  second  case,  that  foreign  countries 
gain.  Since  the  bounty  simply  lowers  prices  without 
extending  trade,  it  benefits  foreign  consumers  without 
driving  any  foreign  producers  from  the  line  of  produc- 
tion favored  into  other  lines.3 


1  The  trade  between  second  and  third  countries  and  their  relative  gains  from 
trade,  may  be  affected.  A  bounty  on  the  production  of  linen  in  Canada  may, 
by  encouraging  export  of  Canadian  linen,  drive  Irish  manufacturers  out  of,  say, 
the  German  market.  Irish  linen  producers  are  injured.  German  linen  con- 
sumers are  benefited.  But  Ireland  can  get  its  own  linen,  thereafter,  more 
cheaply  by  importing  it  from  Canada,  and  gains  in  so  far  as  linen  is  desired  to 
use.  Ireland  is  injured  in  so  far  as  Canada  enters  trade  as  her  competitor  in 
selling  linen  to  Germany,  but  this  loss  is  balanced  by  Germany's  gain.  Ireland 
gains  in  so  far  as  she  secures  linen  from  abroad  more  cheaply  than  she  could 
make  it  herself.  It  becomes  more  economical  for  Ireland  to  devote  herself  to 
some  other  line  or  lines.  If  the  new  products  which  she  now  endeavors  to  ex- 
port are  less  desired  abroad  than  the  old,  the  rate  of  trade  will  tend  to  become 
somewhat  less  favorable  to  Ireland  and  more  favorable  to  these  other  countries, 
than  before.  Ch.  II  (of  Part  II),  §  2.  Ireland  will  also,  probably,  become  some- 
what more  self-sufficient.  But  the  conclusion  remains  that  when  all  other  countries 
except  the  bounty-paying  country  are  considered,  the  general  result  is  favorable. 
See,  however,  Ch.  IV  (of  Part  II),  §  6. 

5  See  Ch.  IV  (of  Part  II),  §  2. 

'  There  is  a  tendency,  also,  for  the  rate  of  trade  to  become  more  favorable 
to  other  countries  and  less  so  to  the  bounty-paying  country.  Money  flows  out 
df  the  latter  and  into  the  former.  Prices  fall,  relatively,  in  the  latter  and  rise, 
relatively,  in  the  former,  though  this  change  would  probably  be  slight  in  the 
case  of  a  bounty  on  only  one  kind  of  goods.     Hence,  foreign  countries  may  be 


THE  NATURE  AND  EFFECTS  OF  BOUNTIES     151 

England  was  for  a  long  time  a  very  great  gainer  by 
virtue  of  the  export  bounties  paid  on  beet  sugar  until 
1903,1  by  the  beet  sugar  producing  countries  of  conti- 
nental Europe. 

Had  only  one  such  country  adopted  a  bounty-paying 
policy,  the  effect  would  have  been  much  larger  exports 
of  sugar  for  that  country  and  a  slightly  lower  price  of 
sugar  for  buying  countries.  This  is  the  kind  of  situation 
discussed  in  our  second  case.  But  when  all  the  Euro- 
pean beet  sugar  countries  were  simultaneously  paying 
bounties  on  exported  sugar,  the  net  result  was  that  no  one 
of  them  could  extend  its  export  trade  to  anything  like 
so  great  a  degree,  while  all  of  them  had  to  accept  very 
low  prices  for  their  product.  There  was  then  a  closer 
approximation  to  the  conditions  described  in  our  third 
case,  though  probably,  since  beet  sugar  largely  displaced 
cane  sugar  from  the  West  Indies  and  elsewhere,  the  con- 
ditions of  case  3  were  not  realized. 

However  this  may  have  been,  it  is  obvious  that  the 
sugar  consumers  of  other  parts  of  the  world  were  great 
gainers  by  virtue  of  these  bounties,  and  gainers  at  the 
expense  of  the  bounty-paying  countries.  Particularly 
did  the  bounties  redound  to  the  profit  of  free-trade 
England,  whose  people  were  not  prevented  by  tariff 
restrictions  from  securing  the  sugar  cheaply.2  So  it 
resulted  that  the  English  were  able  to  consume  several 
times  as  much  sugar  per  capita  as,  for   instance,   the 

able  to  buy  other  goods  than  the  favored  kind  more  cheaply  than  before  from 
the  bounty-paying  country,  while  having  higher  money  incomes  with  which  to 
buy. 

1  Fisk,  International  Commercial  Policies,  New  York  (Macmillan),  1007,  p. 

137. 

2  Although  eventually,  because  of  colonial  sugar  interests  in  the  West  Indies, 
England  supported  the  general  agreement  to  discontinue  the  bounty  competi- 
tion.   It  does  not  follow,  of  course,  that  England  acted  wisely  in  so  doing. 


152     ECONOMIC  ADVANTAGES  OF  COMMERCE 

bounty-paying  Germans.1  Furthermore,  all  those  Brit- 
ish industries  which  depended  upon  the  use  of  sugar 
prospered  in  a  large  degree.2  In  the  confectionery  and 
preserving  trades,  thousands  of  persons  were  employed 
and  many  thousands  of  tons  of  sugar  were  annually  used. 
If,  in  some  distant  future,  the  philosophy  of  protec- 
tionism comes  ever  upon  the  discredit  which  it  deserves, 
the  descendants  of  those  whose  taxes  supported  the 
favored  business  of  sugar  production  may  at  least  con- 
sole themselves  with  the  thought  that  many  foreigners 
were  benefited.  Though  the  bounties  turned  industry 
from  its  natural  channels,  though  they  caused  the  con- 
sumption of  beet  sugar,  when  cane  sugar  would  have 
involved  a  less  labor  cost,  though  they  diminished  the 
economic  well-being  of  the  world  as  a  whole,  though 
part  of  the  taxpayers'  burdens  was  therefore  in  every 
sense  a  net  loss ;  yet  another  part  of  their  burdens  was 
compensated  for  by  extra  gains,  in  the  form  of  cheaper 
sugar,  to  the  people  of  a  neighbor  nation. 

§4 

The  Various  Possible  Effects  of  Bounties  on  Wages  and  Rent 

A  bounty,  or  system  of  bounties,  would  usually  affect 
money  wages  as  compared  with  real  wages,  just  as  does 
a  protective  tariff.  The  immediate  effect  of  a  bounty 
would  be  to  tax  the  people  more  than  it  lowered  the 
price  of  the  goods  favored.  For  illustration,  suppose 
that  Canada  can  buy  linen,  in  Ireland,  for  $i  a  yard, 
while  the  cost  of  linen  produced  in  Canada  is  $1.43. 
By  granting  a  bounty  of  43  cents  or  of  53  cents,  the 

1  Sumner,  Protectionism,  New  York  (Holt),  1885,  p.  81. 
'Ibid.,  p.  86. 


THE  NATURE  AND  EFFECTS  OF  BOUNTIES 


i53 


Canadian  government  enables  home  manufacturers  to 
sell  linen  at  $1  or  at  90  cents  a  yard.  The  people  of 
Canada  lose,  as  taxpayers,  43  cents  to  gain  nothing,  or 
53  cents  to  gain  10  cents.  Unless  the  taxes  are  so  levied 
that  they  do  not  fall  upon  and  cannot  be  shifted  to  wage 
earners,1  real  wages  must  be  lower.2  This  remains 
true  after  the  inflow  of  money  which  raises  prices  (or  the 
outflow  —  case  3  —  which  lowers  prices).  For  money 
prices  and  money  wages  will  tend  to  be  affected  in  equal 
proportion  by  the  change  in  money  supply.  A  bounty 
on  exports  only,  may  lower  the  price  of  the  favored  goods, 
to  foreign  consumers,  at  the  expense  of  taxpaying 
citizens  of  the  bounty-giving  country,  while  it  will  not 
lower  the  price  to  domestic  consumers. 

§5 
Why  Bounties  may  be  Less  Objectionable  than  Protection 
if  Encouragement  of  Infant  Industries  is  in  Any  Case 
to  be  Attempted 

The  bounty  method  has  sometimes  been  recommended 
as  superior  to  the  method  of  protection,  for  the  estab- 
lishing and  developing  of  an  infant  industry.  Since  the 
bounty  system  is  more  clearly  seen  to  involve  taxation, 
public  support  is  less  likely  to  be  given  to  schemes  for 
its  widespread  application.  It  is  perhaps  not  quite  so 
unlikely  that  care  will  be  used  in  deciding  upon  the 
industry  or  industries  to  be  favored.  For  the  same  rea- 
son, the  likelihood  that  the  bounty  will  remain  a  perma- 
nent burden  upon  the  general  public  may  be  somewhat  less. 

1  Even  if  the  necessary  taxes  fall  in  no  sense  upon  wage  earners,  and  so  really  \ 
raise  wages,  they  raise  wages  less  by  turning  labor  into  unprofitable  lines  than 
if  the  money  were  directly  paid  to  wage  earners,  as  a  forced  charity. 

'There  is,  however,  as  with  protection,  a  conceivable  exceptional  case.  Cf. 
Ch.  V  (of  Part  II),  §  s- 


154     ECONOMIC  ADVANTAGES  OF  COMMERCE 

§6 

Summary 

A  bounty,  like  protection,  is  a  special  favor  granted 
by  government  to  some  industry  or  industries.  It 
differs  from  protection  in  that  it  does  not  tax  foreign 
competition,  but  enables  the  domestic  producer  to  meet 
it,  in  that  it  lowers  instead  of  raises  the  price  of  the 
favored  goods,  and  in  that  the  burden  falls  upon  tax- 
payers as  such  rather  than  upon  consumers.  A  bounty 
may  simply  insure  domestic  producers  their  home  mar- 
ket, or  it  may  be  high  enough  to  enable  them  to  meet 
transportation  costs  and  increase  their  foreign  business, 
or  it  may  enable  them  to  sell  the  same  amount  of  goods 
abroad  as  before,  at  lower  prices.  In  the  first  two  cases, 
the  level  of  prices  in  the  bounty-paying  country  will 
rise  as  compared  with  the  levels  in  the  countries  with 
which  it  trades.  In  the  third  case,  the  level  of  prices  in 
the  bounty-paying  country  will  fall.  In  all  three  cases, 
the  effect  on  the  national  prosperity  of  the  bounty-pay- 
ing country  will  almost  certainly  be  unfavorable.  In  the 
second  and  third  cases,  other  countries  will  be  likely  to 
profit  to  some  extent  at  the  expense  of  the  taxpayers  in 
the  bounty-paying  country.  Since  a  bounty  system 
tends  to  burden  the  taxpayers,  with  no  corresponding 
gain  to  the  general  public,  it  tends  to  lower  real  wages, 
for  it  can  hardly  be  supposed  that  wage  earners  will  be 
unaffected  by  the  level  of  taxation.  If  an  infant  indus- 
try is  in  any  case  to  be  established,  however,  the  bounty 
method  may  be  better  than  the  method  of  protection. 


CHAPTER  VIII 

Uneconomical  Government  Interference  with,  and 
Encouragement  of,  Transportation 


Navigation  Laws 

One  of  the  important  methods  which  governments 
have  sometimes  followed  in  order  to  develop  a  national 
mercantile  marine,  has  been  the  method  of  navigation 
acts,  excluding  foreign  vessels  from  certain  designated 
commerce.  For  example,  England's  navigation  acts 
of  1646  to  1660  (act  of  1 65 1  perhaps  of  chief  importance), 
prohibited  the  importation  of  any  goods  into  England  or 
Ireland  or  any  of  the  British  Colonies,  except  in  British 
ships,  owned  and  navigated  by  British  subjects,  or  in 
ships  of  the  country  where  the  goods  were  produced ; 
also  these  laws  prohibited  the  export  to  foreign  ports  of 
any  goods  produced  in  the  American  colonies,  except 
in  British  ships.1  Our  own  Federal  law  regarding  the 
coasting  trade  is  of  the  same  genus.  This  law  requires 
that  "no  merchandise  shall  be  transported  by  water, 
under  penalty  of  forfeiture  thereof,  from  one  port  of  the 
United  States  to  another  port  of  the  United  States, 
either  directly  or  via  a  foreign  port,  or  for  any  part  of  the 
voyage,  in  any  other  vessel  than  a  vessel  of  the  United 
States."  2 

1  See  Lindsay,  History  of  Merchant  Shipping,  London  (Low,  Low  and  Searle), 
1847,  Vol.  II,  pp.  182-189. 

2  30  Stat.  L.  ch.  26,  p.  248.  Referred  to  in  the  Report  of  the  Commis- 
sioner of  Corporations,  on  Transportation  by  Water  in  the  United  States,  Part 

ISS 


156     ECONOMIC  ADVANTAGES  OF  COMMERCE 

Such  navigation  acts  are  closely  analogous  to  protec- 
tive tariffs.  Like  protection,  they  develop  the  favored 
home  industry  by  excluding  foreign  competition,  not, 
as  in  the  case  of  the  bounty,  by  providing  funds  to  help 
meet  this  competition.  Like  protection,  these  laws  can 
do  no  more  than  guarantee  home  patronage ;  they  can 
not  insure  successful  invasions  of  other  commerce,  de- 
pendent solely  on  foreign  patronage.  As  with  protec- 
tion, the  burden  of  these  laws  rests  upon  consumers  (of 
goods  carried  in  the  protected  ships),  rather  than  upon 
taxpayers  as  such.  The  burden  rests  upon  consumers, 
because  the  exclusion  from  the  designated  commerce, 
of  ships  presumably  able  to  carry  goods  more  cheaply 
than  the  favored  domestic  ships,1  tends  towards  high 
transportation  rates,  and,  therefore,  towards  higher  prices 
to  consumers,  of  goods  carried,  or  towards  decrease  of 
domestic  commerce,  or  both.  The  burden  of  such  a 
policy  may  not  be  equally  distributed  over  a  country 
enforcing  it,  but  may  rest  with  especial  weight  upon  those 
sections  of  the  country  which,  being  on  or  near  the  coast 
line,  have  most  to  gain  from  cheap  water  transportation. 
A  navigation  policy  like  that  established  by  the  historic 
navigation  laws  of  England,  above  mentioned,  may  also 
tend,  by  increasing  transportation  costs,  to  limit  the 
export  trade  of  the  country  adopting  such  a  policy.  Only 
in  case  other  countries  have  no  available  alternative 
source  of  supply  for  goods  desired,  can  the  extra  cost  of 

I,  1909,  pp.  118,  119.  Since  the  above  was  written,  Congress  has  passed  a  law 
(August,  1914)  admitting  foreign-built  ships  to  American  registry  if  owned  or 
purchased  by  Americans  (See  New  York  World,  Aug.  18,  1914).  Such  ves- 
sels were  not  previously  ranked  as  American  and  had  to  sail  under  alien  flags. 
But  the  new  law  does  not  permit  foreign-built  ships  to  engage  in  the  coasting 
trade. 

1  If  the  latter  carried  goods  more  cheaply,  they  could  drive  out  foreign  rivals 
without  legal  aid. 


ENCOURAGEMENT  OF  TRANSPORTATION     157 

carrying  these  goods  rest  as  a  burden  on  the  consumers 
of  those  other  countries. 

The  main  argument  against  navigation  laws  is  the  same 
as  that  against  protection.  Like  protection,  it  diverts 
labor  and  capital  from  lines  which  the)-  would  otherwise 
follow,,  into  relatively  unprofitable  lines.  These  laws  are, 
therefore,  as  indefensible,  economically,  as  are  protec- 
tive tariffs.  Where  navigation  laws  would  be  likely  to 
develop  a  national  marine,  able,  eventually,  to  compete 
in  the  world's  commerce  successfully  without  aid,  there 
is  a  reasonable  probability  that  conditions  are  favorable 
to  this  success  and  that  it  would  be  attained  in  time 
without  government  coddling.  Where,  in  spite  of  navi- 
gation laws  intended  to  develop  a  national  marine,  abil- 
ity to  compete  outside  of  the  protected  limits  is  never 
attained,  the  protective  laws  involve  a  continuous  burden 
on  the  general  public.  Whatever  military  justification 
may  exist  for  such  protection  to  national  navigation, 
economic  justification  is  usually  absent,  and  is  probably 
always  of  doubtful  weight. 

Subsidies  to  Native  Shipping 

Another  method  of  encouraging  a  national  mercan- 
tile marine  is  that  of  paying  so-called  shipping  subsidies. 
Shipping  subsidies  are  simply  bounties  paid  to  the  ship- 
ping industry.  What  was  said  in  Chapter  VII  (of  Part  II ) 
regarding  bounties  applies,  therefore,  to  shipping  subsidies. 
Like  bounties  and  like  protective  tariffs,  shipping  sub- 
sidies divert  national  industry  out  of  its  natural  lines 
into  a  line  which,  without  such  encouragement,  it  prob- 
ably would  not  follow,  or  which  it  would  not  follow  to 


158     ECONOMIC  ADVANTAGES  OF  COMMERCE 

the  same  extent.  Unlike  protection,  subsidies  do  not 
exclude  foreign  competition,  but  simply  endeavor,  by 
money  payments,  to  make  it  possible  for  the  national 
marine  to  meet  this  competition.  As  with  other  bounties, 
therefore,  the  burden  falls  upon  taxpayers,  rather  than 
upon  shippers  or  ultimate  consumers.  The  two  last 
classes  may  even  gain  somewhat,  if  a  subsidy  is  sufficient 
to  cause  lower  freight  rates  in  spite  of  the  greater  cost  of 
transportation  in  native  ships.  But  even  these  classes 
will  gain  nothing  if  a  subsidy  is  just  high  enough  to  en- 
able native  ships,  previously  unable  to  compete,  to  charge 
rates  no  higher  (and  no  lower)  than  those  charged  by 
foreign  ships. 

One  of  the  cruder  arguments  for  subsidies,  as  for  pro- 
tective tariffs,  is  to  the  effect  that  when  we  patronize 
foreign  vessels  we  have  to  send  our  money  abroad,  and 
that  we  would  "  save  "  this  money  if  we  carried  the  freight 
in  our  own  vessels.  As  a  matter  of  fact,  money  is  not 
the  one  thing  for  which  trade,  in  the  last  analysis,  is 
carried  on.  Furthermore,  if  money  flows  out  unduly,  it 
thereupon  begins  to  flow  back  again,  in  accordance  with 
the  principles  which  we  have  so  often  set  forth  in  previous 
chapters.1  As  regards  the  most  economical  directions 
of  industrial  and  commercial  development,  it  should 
be  apparent  that  if  British  or  other  ships  can  carry  goods 
more  cheaply  than  our  own  merchant  marine,  then  our 
labor  may  better  be  devoted  to  the  lines  where  it  yields 
greater  returns,  to  services  which  others  cannot  so  well  per- 
form for  us,  to  our  factories,  farms,  mines,  and  railroads. 
If  American  labor  is  more  profitable  when  devoted,  for 
instance,  to  the  running  of  railroad  trains,  then  it  is  poor 
economic  policy  to  draw  it,  by  subsidies,  into  the  running 
of  ships. 

1  See,  for  example.  Part  I,  Ch.  V,  §§  6,  7,  8. 


ENCOURAGEMENT  OF  TRANSPORTATION     159 

Another  argument  for  subsidies  is  based  on  the  asser- 
tion that  "trade  follows  the  flag."  This  assertion,  used 
in  relation  to  subsidies,  suggests  that  a  national  merchant 
marine  acts  as  a  species  of  advertisement,  that,  for  ex- 
ample, the  American  flag  flying  at  the  mast  head  of  a 
merchant  ship  will  stimulate  a  desire  in  South  America 
or  elsewhere,  to  examine,  and,  therefore,  eventually  to 
buy,  American  goods.  Except  for  purposes  of  adver- 
tisement, foreign  ships  serve  as  well  to  carry  American 
goods  to  market  as  do  American  ships,  and  better  in 
proportion  as  they  carry  these  goods  more  cheaply. 

Probably  there  is  some  advertisement  for  a  country's 
goods  in  the  ubiquitousness  of  its  merchant  ships.  Yet 
we  must  beware  of  exaggerating  the  amount  and  the 
value  of  this  advertisement,  and  of  overlooking  its  cost. 
France  has  made  considerable  effort  to  develop  shipping 
and  has  hoped  thereby  to  develop  foreign  commerce, 
while  the  United  States  has  done  almost  nothing  to  stim- 
ulate foreign  trade  in  American  ships ;  yet  a  practically 
stationary  foreign  commerce  of  the  former  country  has 
been  contemporaneous  with  an  extensive  growth  of  the 
commerce  of  the  latter.1  "The  history  of  the  world's 
commerce  seems  to  show  conclusively  that  the  nation- 
ality of  ship  owners  is  quite  a  secondary  matter  in  the 
development  of  trade."  2 

So  far  as  the  presence  of  a  nation's  ships,  e.g.  American 
ships,  on  the  high  seas  and  in  foreign  harbors,  really  tends 
by  its  advertisement  to  stimulate  American  export 
trade,  it  would  seem  that  the  persons  having  to  pay  for 
this  advertisement  should  be  those  who  expected  to 
reap  special  gain  from  it.      Why  should  not  merchants 

1  Meeker,  History  of  Shipping  Subsidies  (in  publications  of  the  American 
Economic  Association,  August,  1905),  p.  213.  '  Ibid. 


160    ECONOMIC  ADVANTAGES  OF  COMMERCE 

and  manufacturers  who  are  interested  in  exploiting  the 
trade  of  any  part  of  the  world,  and  who  seriously  think 
that  the  presence  there  of  vessels  flying  the  American 
flag  will  bring  them  a  larger  market,  be  willing  to  sub- 
scribe to  the  stock  of  American  lines,  or  pay  a  little  extra 
to  have  their  goods  carried  in  American  vessels,  or  both  ? 
Is  it  not  possible  that  American  merchants  and  manu- 
facturers will  not  do  this  to  any  great  extent,  because  the 
gain  would  be  so  small  as  not  to  equal  the  cost  ?  Hard- 
headed  business  men  spend  a  great  deal  of  money  in  ad- 
vertising. Some  of  them  are  enthusiastic  over  the  as- 
sumed gains  of  this  particular  kind  of  advertising  if  it 
is  proposed  that  it  shall  be  done  at  public  expense  by 
means  of  subsidies.  But  would  they  consider  the  rather 
problematical  results  of  such  indirect  and  indefinite 
advertising  worth  paying  for  out  of  their  own  business 
profits?  By  the  subsidy  method,  many  persons  and 
many  sections  of  the  country  are  taxed  to  secure  results 
which  may  be  of  little  or  no  benefit  to  them  and  which 
are  probably  of  not  very  much  benefit  to  any  one. 

Another  argument  in  favor  of  subsidies  is  one  that 
corresponds  to  the  infant  industry  argument  for  protec- 
tion. It  is  urged,  in  this  view,  that  subsidies  should 
be  given  to  divert  industrial  and  commercial  activity 
more  largely  into  shipping,  in  the  hope  that  the  mer- 
chant marine  will  develop  in  efficiency  until  it  is  able  to 
stand  alone.  An  important  counter-argument  is  the  fact 
that  no  one  is  able  to  foresee  with  any  certainty  whether 
or  not  the  shipping  industry  ever  can  stand  alone  and 
that  legislators  are  less  likely  to  risk  the  public  wealth 
wisely  than  business  men  are  to  risk  their  own.  There 
is  great  danger  that  subsidies,  once  started,  would  con- 
tinue indefinitely  on  the  plea  that  they  continued  to  be 


ENCOURAGEMENT  OF  TRANSPORTATION     161 

necessary.1  And  if,  as  a  consequence  of  a  subsidy  system, 
the  national  mercantile  marine  should  become  larger, 
though  at  the  general  expense,  then  the  political  pressure 
to  maintain  the  subsidy  system  would  very  probably 
become  greater.  It  is  altogether  too  probable  that  if 
the  giving  of  subsidies  is  generally  recognized  as  a  proper 
function  of  government,  men  who  would  otherwise  de- 
vote themselves  to  planning  improvements  and  to  seek- 
ing real  progress  in  efficiency,  will  instead  devote  them- 
selves to  influencing  political  action,  in  order  that  they 
may  get,  or  maintain,  or  increase,  a  subsidy.2  This 
method  of  acquiring  gain  is  not  consistent  with  the  ideal 
of  industrial  and  commercial  morality.  Industry  and 
commerce  should  be  so  organized  that  profits  will  be  made 
only  by  serving  the  public,  and  that  profits  will  be  large 
to  any  person  or  firm  in  proportion  as  that  person  or  firm 
serves  the  public  well.  The  prosperity  of  those  engaged 
in  operating  a  nation's  merchant  marine  ought  not  to  be 
made  dependent  upon  their  political  influence  rather  than 
upon  their  economic  service. 

Apart  from  purely  economic  considerations,  shipping 
subsidies  are  sometimes  urged  as  a  means  of  increasing  a 
nation's  naval  strength.  Two  principal  naval  reasons 
are  commonly  given  for  the  maintenance  of  a  merchant 
marine,  even  at  the  expense  of  a  subsidy.  The  first  is 
the  desirability  of  having  a  "naval  reserve"  made  up  of 
large  and  swift  merchant  steamers  suitable  for  conver- 
sion into  cruisers,  colliers,  and  transports,  should  need 
for  such  arise.  As  a  matter  of  fact,  it  is  only  as  colliers 
and  transports  that  such  vessels  are  likely  to  be  useful, 
since  ships  of  war  are  nowadays  highly  specialized,  and 

1  Meeker,  History  of  Shipping  Subsidies,  p.  81. 

2  Ibid.,  p.  216. 
PART   H  —  M 


i62     ECONOMIC  ADVANTAGES  OF  COMMERCE 

merchant  vessels  cannot,  economically,  be  made  over 
into  cruisers.1  The  second  reason  is  the  desirability  of 
having  experienced  seamen  from  whom  to  recruit  colliers, 
transports,  and  additional  fighting  ships  when  war  threat- 
ens, to  replace  those  killed  and  wounded,  to  hold  cap- 
tured vessels,  etc. 

These  objects  may  be  perfectly  justifiable,  even  laud- 
able, in  themselves.  And  it  may  be  cheaper  to  pay 
subsidies  to  certain  lines,  thus  helping  to  keep  them  in 
ships  and  men  capable  of  emergency  use  by  government, 
but  letting  them  be  mainly  supported  by  commerce, 
than  to  support,  continuously,  and  wholly  at  public  ex- 
pense, a  larger  naval  force.  But  if  the  policy  of  sub- 
sidizing ships  appears  necessary  to  us  for  military 
reasons,  we  should  frankly  recognize  that  this  policy 
involves  an  economic  loss,  that  it  is  an  expense  borne 
for  the  same  purpose  as  the  expense  of  maintaining  a  navy. 
We  should  not  deceive  ourselves  into  the  belief  that  the 
subsidizing  of  ocean  navigation  is  an  economically  profit- 
able policy.  We  should  therefore  aim  to  get  the  largest 
military  result  possible  at  the  smallest  possible  cost. 
Large  payments  to  swift  mail  lines  and  possibly  to  cer- 
tain other  ships  constructed  for  speed  and  carrying  ca- 
pacity and  conforming,  in  other  ways,  to  possible  emer- 
gency requirements,  mark  the  limit  beyond  which  we 
should  not  go  in  subsidizing,  even  if  we  should  go  so  far. 
Subsidies  granted  according  to  these  principles  are  pay- 
ments for  certain  definite  services  or  potential  services, 
and  are  not  to  be  classed  with  subsidies  granted  for 
purely  commercial  reasons. 

1  Meeker,  History  of  Shipping  Subsidies,  p.  215. 


ENCOURAGEMENT  OF  TRANSPORTATION     163 


Indirect  Subsidies,  Favoring  Native  Ships  as  Compared 
with  Foreign  Ships 

A  country  may  try  to  extend  and  develop  its  own 
merchant  marine,  to  the  consequent  decrease  (or  slower 
increase)  of  the  number  of  foreign  ships,  by  indirect  as 
well  as  by  direct  subsidies.  Any  service  which  a  coun- 
try, through  its  government,  performs  for  its  own  ships 
without  pay,  while  charging  foreign  vessels  for  it,  is 
equivalent  to  a  money  subsidy. 

Were  it  not  for  clear  treaty  obligations,  there  would 
probably  be,  in  the  United  States,  as  strong  a  demand 
for  free  use  of  the  Panama  Canal  by  all  of  our  American 
merchant  ships,  as  there  has  actually  been  for  its  free 
use  by  American  vessels  engaged  in  the  coasting  trade.1 
To  let  American  vessels  use  the  Panama  Canal  free  would 
be  equivalent  to  a  money  subsidy,  because  it  would 
amount  to  the  same  thing  as  to  make  a  charge  for  the 
use  of  the  canal  and  then  to  make  a  payment  equalling 
this  charge,  to  American  shipping  interests.  In  either 
case,  the  taxpayers  of  the  nation  would  bear  a  burden, 
or  lose  a  chance  for  lower  taxes,  that  special  interests 
might  be  encouraged.  For  if  letting  American  ships 
use  the  canal  free  would  mean  that  the  canal  could  never 
pay  a  reasonable  return  on  its  cost,  then  taxpayers  must 
meet  the  deficit  by  taxes  paid  to  government  over  a 
series  of  years,  in  order  to  liquidate,  or  at  least  pay  in- 
terest upon,  the  indebtedness  caused  by  building.  If, 
on  the  other  hand,  though  all  American  ships  used  the 
canal  free  of  tolls,  the  amounts  collected  from  foreign 

1  For  a  discussion  of  the  economic  advisability  of  giving  American  coasting 
lines  this  special  privilege,  see  §  4  of  this  chapter  (VIII  of  Part  II). 


1 64    ECONOMIC  ADVANTAGES  OF  COMMERCE 

ships  would  suffice  to  pay  interest  on  the  debt  contracted, 
still  this  interest  might  be  had  and  more  besides,  were 
the  American  lines  also  made  to  contribute.1  In  other 
words,  to  allow  American  ships  free  use  of  the  canal  must, 
in  any  case,  mean  either  a  loss  or  a  smaller  net  revenue 
yielded  to  the  government  than  might  otherwise  be 
yielded.  If  the  canal  is  to  yield  the  nation  a  revenue 
because  of  its  use  by  foreign  ships,  that  revenue  should 
be  used  to  lighten  the  burden  of  taxation  on  the  whole 
people ;  it  should  not  be  used  to  encourage  a  single  in- 
dustry by  giving  it  something  for  nothing.  Thus  to  en- 
courage American  shipping  would  be  to  give  it  an  artifi- 
cial advantage  over  other  American  industries,  and  would 
be,  in  so  far,  to  interfere  with  the  tendency  of  labor  and 
capital  to  engage  in  the  industries  really  most  profitable 
for  the  nation.  There  is  no  economic  gain2  in  having 
our  commerce  carried  in  American  ships  if  foreign  ships 
are  able  to  carry  it  more  cheaply.  Nor  would  the  pros- 
perity of  the  nation  as  a  whole,  including  those  who  bear 
the  burden  of  taxation,  be  so  much  furthered  by  having 
our  commerce  carried  in  American  ships  which  could 
pay  little  or  nothing  for  the  use  of  the  canal,  as  by 
having  it  carried  in  foreign  vessels  which  could  pay  a 
reasonable  amount  for  its  use  without  charging  corre- 
spondingly higher  transportation  rates.  Assuming  these 
to  be  the  relative  abilities  of  native  and  foreign  vessels,' 

1  It  is  not  intended  to  assert  that  either  American  or  foreign  ships  should  be 
charged  exorbitant  rates.  Such  rates  on  ships  carrying  American  commerce, 
of  whatever  nationality  the  ships  might  be,  would  tend  to  discourage  this  com- 
merce, even  when  it  could  pay  the  proper  costs  of  its  own  movement  and  would 
therefore  be  profitable.  As  to  the  effect  on  American  welfare  of  exorbitant 
rates  charged  ships  not  carrying  American  commerce,  see  footnote  at  end  of  this 
section. 

1  Unless  we  assume  a  gain  from  the  advertisement  thus  secured.  See  §  2  of 
this  chapter  (VIII  of  Part  II). 


ENCOURAGEMENT  OF  TRANSPORTATION     165 

the  foreign  vessels  would  be  a  more  economical  means 
for  us  of  carrying  our  commerce  than  our  own;  for 
them  to  carry  it  would  mean  either  lower  rates  and, 
therefore,  lower  prices  to  consumers  and  higher  prices 
to  producers,  or  larger  returns  to  the  government,  favor- 
able to  taxpayers,  or  both  such  lower  rates  and  higher 
prices ;  for  them  to  carry  our  commerce  would  mean  gain 
to  our  people  as  producers  and  consumers,  or  as  tax- 
payers, or  as  both.  It  would  be  desirable,  therefore, 
for  our  capital  and  labor  to  seek  other  kinds  of  activity ; 
but  this  is  just  what  discrimination  in  the  rates  charged 
for  use  of  the  canal  would  prevent.1 

§4 

The  Free  Use  for  Navigation  of  Government-built  Canals 

Since  to  give  free  use  of  the  Panama  Canal  to  all  Amer- 
ican ships  and  to  no  others,  seemed  clearly  to  involve 
a  violation  of  treaty  obligations,  Congress  was  content, 
in  the  Panama  Canal  Act  of  191 2,  to  confer  this  privi- 
lege only  upon  American  ships  engaged  in  the  coasting 
trade.  Even  this  lesser  tolls  exemption  appeared  to 
many  to  be  a  violation  of  treaty  rights;  and  the  law 
has  recently, 2  at  the  request  of  President  Wilson,  been 
changed  in  this  regard  so  as  to  require  the  same  charges 
from  American  coasting  vessels  as  from  all  other  mer- 
chant ships.     We  shall  discuss,  here,  the  possible  eco- 

1  Were  we  to  plan/intelligently,  so  to  discriminate  in  rates  charged  for  use  of 
the  Panama  Canal,  as  to  pay  for  it,  as  largely  as  possible,  at  the  expense  of  for- 
eigners, we  would  base  the  discrimination  on  the  sources  and  destinations  of 
goods  carried,  rather  than  on  the  nationality  of  the  ships  which  carried  them. 
Goods  going  to  and  from  the  United  States  would  be  allowed,  perhaps,  to  pass 
through  the  canal  at  fairly  low  rates,  lest  American  consumers  or  producers  be 
unduly  taxed ;  while  goods  going  from  one  foreign  country  to  another  would  be 
charged  the  highest  rates  possible  to  collect. 

*  June,  1914. 


166    ECONOMIC  ADVANTAGES  OF  COMMERCE 

nomic  effects  of  tolls  exemption  for  American  coasting 
ships.  As  we  have  already  seen,1  the  Federal  govern- 
ment assures  American  vessels  a  monopoly  of  the  coast- 
ing trade,  including  the  trade  from  any  port  of  the  United 
States  to  any  other  port,  e.g.  from  Baltimore  to  San 
Francisco.  Free  use  of  the  Panama  Canal  by  American 
vessels  engaged  in  the  coasting  trade  could  not,  there- 
fore, increase  our  mercantile  marine  at  the  expense  of 
foreign  rivals  in  the  trade.  The  primary  effect  of  free 
tolls  to  this  special  class  of  ships  would  be  to  reduce  the 
expense  of  coast  to  coast  trade,  and  therefore,  supposedly, 
to  reduce  rates.  Possibly  foreign  vessels  could  carry  at 
the  lower  rates,  even  without  free  tolls.  If  the  coasting 
trade  were  open  to  foreign  ships,  the  effect  of  discrim- 
ination in  favor  of  American  vessels  engaging  in  this 
trade  might  simply  be  that  the  American  ships  would  be 
able  to  get  part  of  the  trade  away  from  their  foreign 
competitors,  at  substantially  the  same  rates.  As  it  is, 
such  free  tolls  would  tend  to  make  rates  lower  than  they 
would  else  be,  though  much  of  the  saving  might  be  di- 
verted to  the  owners  of  monopolistic  navigation  com- 
panies. Hence  traffic  would  be  encouraged  to  go  through 
the  canal,  which  otherwise  would  not. 

The  construction  of  a  canal  across  the  Isthmus  of 
Panama,  to  be  used  without  charge  by  American  coasting 
vessels,  would  therefore  mean  that  traffic  from  the  East 
to  the  West,  and  vice  versa,  which  is  not  worth  the 
whole  cost  of  carrying,  might  nevertheless  be  carried 
at  the  expense  of  the  tax-paying  public.  If  it  is  worth 
$5000  to  get  certain  goods  from  New  York  to  San  Fran- 
cisco, and  the  cost  of  carriage,  including  proper  payment 
for  all  necessary  facilities,  is  $6000,  and  if  this  cost  is 

1  §  1  of  this  chapter  (VIII  of  Part  II). 


ENCOURAGEMENT  OF  TRANSPORTATION     167 

covered  by  the  charge  made,  the  goods  will  not  be  sent. 
It  will  be  more  economical  to  have  a  greater  degree  of 
local  self-sufficiency  and  less  geographical  division  of 
labor.  But  if  the  taxpayers  should  contribute  more 
than  $1000  in  the  form  of  maintenance  and  running 
cost  of  the  canal,  and  interest  on  its  cost  of  construction, 
then  the  goods  would  be  shipped,  for  the  charge  to  the 
shippers  could  be  made  less  than  $5000.  The  total  cost 
would  be  $6000  and  the  total  gain  would  be  $5000. 
There  would  be  a  real  net  loss.  But  this  loss  would  be 
borne  by  the  taxpayers,  and  therefore  the  traffic  would 
be  carried. 

Again,  the  encouragement  of  the  coasting  trade  by 
the  building  of  an  Isthmian  ship  canal  to  be  used  by 
coasting  vessels,  free  of  charge,  might  mean  that  goods 
would  be  carried  by  water  or  partly  by  water,  at  the  tax- 
payers' expense,  which  might  be  more  economically 
carried  by  rail.  Suppose  that  a  quantity  of  goods  can 
be  shipped  from  New  York  to  Salt  Lake  City  by  rail  for 
$4000,  including  a  proper  allowance  for  wages  of  em- 
ployees and  something  towards  profits.  Suppose  that, 
at  the  same  time,  the  cost  by  water  and  rail,  including 
risk,  damage,  longer  time  in  transit,  maintenance  cost 
of  the  canal  and  interest  on  canal  facilities  provided, 
is  $5000.  $1000  may  be  saved  if  the  goods  go  by  rail, 
and  to  make  them  go  by  the  other  route,  if  we  include 
interest  on  the  cost  of  partly  constructing  this  route  for 
them,  maintenance  expenses,  etc.,  would  be  to  waste 
$1000.  The  community  or  the  nation  would  be  so  much 
poorer,  yet  if  the  government  were  to  provide  the  $1000 
or  more  in  the  form  of  canal  facilities  paid  for,  eventually, 
by  the  taxpayers,  shippers  would  gain  by  using  the  water- 
way route. 


168     ECONOMIC  ADVANTAGES  OF  COMMERCE 

It  is  not  asserted,  of  course,  that  all  goods  ought  to 
pay  in  the  same  proportion  to  use  the  canal,  if  discrimi- 
nations should  prove  to  be  practicable.  If  the  plant 
is  incompletely  utilized,  it  may  not  be  improper  to  let 
some  goods  go  through  for  comparatively  low  rates, 
provided  they  would  not  otherwise  go  at  all.  But  no 
goods  ought  to  be  allowed  to  go  through  which  cannot 
pay  at  least  a  fair  share  towards  running  expenses,  wear 
and  tear  from  use,  and  (probably)  a  little  towards  inter- 
est. And  the  canal  should  not  have  been  built  (mili- 
tary considerations  aside  x) ,  unless  it  was  expected  that 
the  traffic  through  it,  as  a  whole,  would  be  enough  cheaper 
to  pay  interest  on  it.  To  build  it,  if  it  could  not  be  made 
to  pay,  was  economic  waste,  was,  as  above  pointed  out, 
to  encourage  transportation  not  really  worth  its  total 
cost  to  the  people.  Now  that  the  canal  is  completed,  it 
would  be  unfair  to  the  American  people  as  a  whole  that 
the  traffic  which  goes  through  it  should  not,  if  possible, 
pay  for  it,  that  those  who  realize  the  chief  benefit  should 
not  contribute  in  proportion  to  the  benefit  realized. 

Here,  as  in  the  case  of  protection,  we  meet  the  possibil- 
ity that  government  interference  with  the  direction  of 
industry  may  affect  differently  the  people  of  different 
sections,  benefiting  some  at  the  expense  of  others.  It  is 
obviously  only  that  part  of  our  population  living  on  or 
reasonably  near  the  coast,  which  has  much  to  gain  from 
subsidizing,  directly  or  indirectly,  coast  to  coast  water 
transportation.  Those  living  in  the  far  interior  will,  in 
any  event,  have  to  rely  mainly  on  other  means  of  trans- 
portation. Yet  by  the  scheme  of  indirect  subsidizing 
under  discussion,  but  which  has,  fortunately,  been  aban- 

1  As  a  matter  of  fact,  it  is  hardly  to  be  doubted  that  economic  considerations 
had  great  weight  in  inducing  its  construction. 


ENCOURAGEMENT  OF  TRANSPORTATION     169 

doned,  those  in  the  interior  would  be  made  to  contribute 
to  the  cost  of  facilities  of  transportation  which  others 
use  and  which  they  cannot  use  in  the  same  degree.1 

The  principles  above  elaborated  apply  equally  when 
government  builds  canals  in  the  interior,  if  traffic  is  al- 
lowed to  use  these  canals  free  of  charge.  New  York 
State  is  now  enlarging  the  once  busy  and  profitable  Erie 
Canal  at  an  estimated  cost  of  not  less  than  $100,000,000, 
in  order  that  it  may  carry  barges  of  1000  tons  capacity 
from  the  Atlantic  Ocean  to  the  Great  Lakes  and  vice 
versa.  The  plan  is  to  charge  nothing  for  the  use  of  the 
canal.  This  will  mean  a  burden  on  the  taxpayers  of 
the  state,  an  uncompensated  loss  to  the  taxpayers  in 
those  parts  of  the  state  which  cannot  economically  use 
the  canal  either  to  market  their  produce  or  to  obtain 
goods  for  consumption.  It  amounts  to  a  gift  by  the  tax- 
payers of  the  state  of  New  York  to  those  producers  and 
consumers  in  other  states,  who  can  sell  their  products  for 
more  or  buy  desired  goods  for  less,  because  of  the  free 
use  of  the  Erie  Canal.  It  involves  encouragement  to 
transportation  via  the  canal  of  goods  which  might  better 
go  by  railway  or  by  the  St.  Lawrence  river.  If  the  traffic 
which  is  expected  to  use  the  canal  would  be  able  to  pay 
the  cost  of  operation  and  maintenance,  and  interest  on 
the  $100,000,000  or  more  sunk  and  to  be  sunk,  then  it 
should  be  charged  this  cost  and  interest,  to  the  end  that 
those  who  reap  the  benefit  of  the  canal  in  lower  cost  of 
carriage,  and  in  prices  of  goods  higher  to  producers  and 
lower  to  consumers,  shall  pay  for  the  advantage  so  se- 

1  An  excuse  for  such  discrimination  against  dwellers  in  the  interior  might 
perhaps  be  found  in  the  fact  that  those  living  on  the  coast  chiefly  bear  the  burden 
resulting  from  the  limitation  of  the  coasting  trade  to  American  vessels.  Two 
policies,  each  tending  towards  economic  waste,  would  partially  offset  each  other 
as  regards  inequality  of  effect. 


170    ECONOMIC  ADVANTAGES  OF  COMMERCE 

cured ;  and  that  those  who  reap  the  most  gain  shall  pay 
the  most ;  and  to  the  end  that  the  burden  shall  not  fall 
upon  the  general  pubb'c  without  any  regard  to  propor- 
tionate use  and  to  benefits  received.1  If,  on  the  other 
hand,  it  is  not  believed  that  those  using  the  canal  can 
meet  such  charges  and  still  find  it  profitable  to  carry- 
goods  over  it,  then  we  must  conclude  that  the  canal 
ought  not  to  be  (or,  in  part,  to  have  been)  enlarged, 
since  the  total  expenses,  including  cost  of  this  enlarge- 
ment, of  carrying  goods  over  it,  will  probably  be  greater 
than  the  benefits  to  be  received  from  transporting  the 
goods,  or  will  be  greater  than  if  the  goods  were  carried 
over  another  route,  e.g.  a  railroad. 

Before  the  days  of  railroads,  much  confidence  was  felt 
in  the  possibilities  of  canals.  A  number  of  our  states 
expended  a  great  deal  of  money  in  canal  building.  To- 
day it  is  generally  recognized  that,  since  the  capital  cost 
of  canals  is  a  tremendous  initial  expense,  railroads  are 
generally  cheaper.  Only  in  a  comparatively  few  cases 
can  canal  building  be  expected  to  pay.  These  are,  first, 
cases  where  the  canals  connect  navigable  waters  located 
near  to  each  other,  and  between  which,  if  they  are  con- 
nected by  a  canal,  there  will  be  large  traffic  ;  second,  cases 
where  comparatively  short  canals,  like  the  Suez  Canal, 
save  a  very  great  sailing  distance  and  so  are  extensively 
used ;  third,  cases  more  doubtful,  where  short  canals  con- 
nect with  the  ocean,  great  cities  which  have  grown  up  not 

1  It  is  no  sufficient  answer  to  this  contention  to  cite  the  usual  practice  regard- 
ing our  numerous  streets  and  roads.  To  charge  tolls,  individually,  on  each 
person  as  he  used  any  given  street,  would  obviously  be  an  intolerable  nuisance. 
These  facilities  we  must  have,  anyway,  and  substantial  justice  may  be  secured, 
if  care  is  taken  to  avoid  extravagance,  by  levying  on  local  property  owners  accord- 
ing to  some  fair  system.  Since  land  values  depend  largely  on  streets,  etc.,  it 
may  be  possible,  by  basing  assessments  or  taxes  on  land  values,  to  make  costs 
to  different  persons  vary,  on  the  whole,  in  proportion  to  benefits. 


ENCOURAGEMENT  OF  TRANSPORTATION     171 

far  from  it.1  "Practically  all  the  canals  now  in  most  suc- 
cessful use  are  ship  canals,  forming  comparatively  short 
links  between  important  natural  waterways,  and  opening 
up  extended  routes  of  transportation  by  water  for  large 
vessels.  Such  short-link  ship  canals  are  to  be  clearly 
distinguished  from  long  inland  canals,  and  the  success 
of  the  one  offers  no  safe  criterion  as  to  the  probable 
success  of  the  other."2  Moulton's  study  of  the  much 
vaunted  waterway  system  of  Germany  seems  to  provide 
conclusive  evidence  that  canals  are  as  cheap  as  railways 
for  shippers,  only  if  the  taxpayers,  in  effect,  help  pay  the 
freight,  and  that,  in  general,  canals  and  canalized  rivers 
involve  tremendous  loss  to  the  nation  which  undertakes 
their  construction,  and  are  therefore  a  source  of  indus- 
trial and  commercial  weakness  rather  than  of  strength.3 
If  there  were  adequate  reason  to  believe  that  canals, 
generally,  were  cheaper  and  more  satisfactory  means  of 
transportation  than  railroads,  it  would  not  be  necessary 
to  have  public  agitation  and  political  pressure  to  get 
canals  built.  Private  companies  would  undertake  to 
build  them  for  profit,  just  as  they  build  railroads  for 
profit,  and  just  as  canals  were  built,  in  England  particu- 
larly, before  the  days  of  railroads.4  As  a  matter  of  fact, 
investors  are  not  clamoring  for  a  chance  to  buy  the  securi- 
ties of  such  companies,  nor  are  promoters  eagerly  looking 
for  opportunities  to  project  new  lines.     When  the  build- 

1  Preliminary  Report  of  United  States  National  Waterways  Commission, 
191 1,  pp.  13,  14.  Reprinted  in  Final  Report,  1912,  pp.  75,  76.  See,  however, 
as  to  an  example  of  the  third  class  of  cases,  viz.  the  Manchester  Ship  Canal, 
Moulton,  Waterways  versus  Railways,  Boston  and  New  York  (Houghton  Mif- 
flin Co.),  1912,  Ch.  VII. 

2  Report  of  Commissioner  of  Corporations  on  Transportation  by  Water  in 
the  United  States,  Part  I,  p.  45. 

'  Moulton,  Watenv ays  versus  Railways,  Chs.  IX,  X. 
*  Ibid.,  p.  99. 


172     ECONOMIC  ADVANTAGES  OF  COMMERCE 

ing  of  canals  is  mentioned  favorably,  the  assumption  is 
always  made  that  taxpayers  shall  bear  the  burden,  or 
at  least  the  risk,  of  building  them. 

§5 

The  Improvement  of  Harbors 

Water  transportation  which  is  not  worth  its  cost,  may 
likewise  be  stimulated  by  a  wrong  system  of  harbor  im- 
provement. In  the  United  States,  the  construction  and 
care  of  lighthouses,  the  building  of  breakwaters,  the 
dredging  of  harbors,  and  the  dredging  of  channels  between 
the  sea  and  harbors,  are  done  largely  by  the  Federal  gov- 
ernment.1 It  cannot  be  said  that  nothing  is  paid  to- 
wards the  expenses  involved,  by  the  traffic  aided,  since  the 
tonnage  dues  collected  by  the  government  amount  to 
$800,000  or  $900,000  a  year.2  But  considering  the  fact 
that  the  Federal  government  appropriates  about  $5,000- 
000  a  year  for  lighthouse  maintenance  alone,3  and,  on 
the  average,  appropriates  millions  of  dollars  each  year 
for  dredging,  breakwater  construction,  etc.,  the  traffic 
entering  and  leaving  the  ports  of  the  United  States  can- 
not be  said  to  bear  the  costs  which  it  occasions.  Rather 
is  this  traffic,  in  a  considerable  degree,  subsidized  at  the 
expense  of  taxpayers.  As  with  canals,  so  with  light- 
houses and  harbors,  we  must  conclude  that  those  who 
benefit  by  them  should  be  the  ones  required  to  pay  for 
them,  and  that  to  place  the  burden  of  their  construction 

1  Report  of  Commissioner  of  Corporations  on  Transportation  by  Water  in  the 
United  States,  Part  III,  1909,  pp.  39,  40. 

2  Johnson,  Ocean  and  Inland  Water  Transportation,  New  York  (Appleton), 
191 1,  p.  252.  Given  in  Report  of  Commissioner  of  Corporations  on  Transporta- 
tion by  Water  in  the  United  States,  Part  I,  p.  404,  as  $1,076,571.69  in  1908. 
The  coasting  trade  is  free  even  from  this. 

3  Ibid.,  p.  262. 


ENCOURAGEMENT  OF  TRANSPORTATION     173 

and  support  on  the  general  public,  with  no  reference  to 
benefit  received,  is  undesirable  and  unfair.1  We  must 
further  conclude  that  constructions  and  improvements 
made  in  harbors,  for  which  the  traffic  using  the  harbors 
cannot  afford  to  pay,  involve  national  economic  loss  and 
ought  not  to  be  undertaken. 

In  many  cases  the  money  spent  in  harbor  improve- 
ments by  the  Federal  government  is  wholly  or  partly 
wasted,  for  appropriations  are  frequently  made  for  which 
there  is  no  economic  justification  and  for  which  there 
would  be  no  economic  justification  even  if  the  largest 
sums  possible  were  to  be  realized  by  charging  the  users. 
Such  wasteful  appropriations  are  doubtless  in  part  due 
to  lack  of  business  sense  among  legislators.  They  are 
perhaps  more  largely  due  to  the  pressure  of  local  interests. 
The  very  fact  that  these  appropriations  are  so  largely 
made  by  the  central  government,  and  that  there  is,  or 
seems  to  be,  a  chance  for  interested  localities  to  get  some- 
thing for  nothing,  results  in  expenditures  which  would 
not  be  made  if  the  localities  particularly  concerned  had 
always  to  provide  the  means,  or  if  private  capital  had  to 
be  induced  to  do  so.2 

1  It  is  not  a  sufficient  answer  to  the  above  argument,  to  assert  that  our  tariff 
system  taxes  trade  and  that  therefore  this  trade  pays  for  itself  by  paying  for 
the  facilities  used.  For  the  burden,  nevertheless,  does  not  fall  where  it  properly 
belongs.  It  does  not  fall  anything  like  evenly  on  all  traffic  which  uses  the  facil- 
ities provided.  On  some  goods  the  tariff  has  been,  until  recently,  prohibitive, 
artificially  interfering  with  normal  and  profitable  trade.  On  other  commerce 
and  on  passenger  traffic,  the  tariff  duties  are  little  or  nothing.  Such  commerce  and 
traffic  may,  in  effect,  be  receiving  a  subsidy,  while  the  remainder  of  commerce 
is  burdened.  The  principle  of  charging  the  cost  of  facilities  provided,  to  those 
who  use  them  and  upon  different  interests  in  some  proper  proportion  to  the 
benefit  received,  is  not  conformed  to.  We  fall  far  short  of  the  economic  ideal 
when  we  set  up  contradictory  policies  of  discouragement  and  encouragement. 
These  contradictory  policies  do  not  exactly  neutralize  each  other,  but  in  one  case 
there  is  a  net  loss  in  one  direction,  and  elsewhere  there  is  a  net  loss  in  another 
direction. 

2  Cf.  Preliminary  Report  of  National  Waterways  Commission,  p.  20  (Final 
Report,  p.  82). 


T74     ECONOMIC  ADVANTAGES  OF  COMMERCE 

A  different  system,  and  one  which  is  economically 
more  defensible,  is  that  common  in  Great  Britain.  There 
the  central  government,  except  as  naval  considerations 
may  be  involved,  does  nothing  whatever  by  way  of  har- 
bor improvement,  but  leaves  this  matter  to  the  localities 
immediately  concerned.  The  British  system  of  harbor 
improvement  and  maintenance  requires  the  creation  for 
each  harbor  of  a  so-called  "public  trust"  or  public  harbor 
trust.1  A  public  harbor  trust  is  a  semi-public  body  or  a 
corporation,  authorized  by  parliament,  to  which  body  is 
granted  power  to  own,  improve,  and  manage  a  particu- 
lar harbor.  It  has  been  compared 2  to  the  board  of 
trustees  of  an  American  university  or  charitable  institu- 
tion. The  members  receive  no  salaries,  but  regard  their 
position  as  an  honorary  one.  The  composition  of  a 
harbor  trust  is  determined  by  statute.  Representatives 
are  usually  selected  by  the  British  government,  the 
government  of  the  city  concerned,  boards  of  trade  and 
chambers  of  commerce,  ship  owners'  associations,  and 
other  interested  parties.  Money  is  borrowed  for  neces- 
sary improvements,  usually  at  low  rates,  for  the  harbor 
trust  is  authorized  to  collect  port  and  dock  charges  from 
vessels  utilizing  the  facilities  given,  and  this  power  makes 
the  security  good,  at  least  in  the  case  of  a  port  sure  to  have 
large  traffic.  Sometimes  money  is  borrowed  from  the 
municipality  itself.  In  any  case,  money  needed  in  excess 
of  what  has  been  collected  in  previous  years  from  traffic, 
is  borrowed,  and  must  be  paid  back  out  of  future  collec- 
tions. There  are  no  stockholders,  and,  therefore,  there 
is  no  attempt  to  make  a  profit  above  a  fair  interest  and 

1  Described  in  Smith,  The  Organization  of  Ocean  Commerce,  Philadelphia 
(Publications  of  the  University  of  Pennsylvania),  1905,  pp.  129,  130. 
*  Ibid. 


ENCOURAGEMENT  OF  TRANSPORTATION     175 

sinking  fund.  Indeed,  a  private  corporation  authorized 
to  collect  tolls  from  all  the  shipping  of  a  port,  for  the  sake 
of  dividends  to  stockholders,  would,  unless  strictly  regu- 
lated, be  an  intolerable  monopoly. 

But  the  British  system  of  harbor  control  does  make 
the  traffic  pay  for  the  facilities  required,  and  is  in  so  far 
consistent  with  the  economic  principles  so  wisely  applied 
to  British  trade  and  commerce  generally.  There  is  no 
attempt  to  encourage  trade  which  is  not  nationally 
profitable,  by  partly  supporting  it,  i.e.  by  providing  free 
harbor  facilities  at  public  expense  and,  therefore,  at  the 
expense  of  other  lines  of  economic  activity,  any  more 
than  there  is  the  attempt  to  interfere  with  nationally 
profitable  trade  by  high  tariff  duties.  The  public  trust 
unites  responsibility  with  direct  action.  It  furthers 
efficiency,  economy,  and  lowness  of  rates,  but  it  does  not 
subsidize. 

The  function  of  maintaining  lighthouses,  however, 
almost  of  necessity  devolves  upon  a  central  government. 
No  city  or  private  corporation  is  in  a  position  to  perform 
this  function  and  make  the  traffic  benefited  pay  for  the 
service  provided,  since  much  of  the  benefit  will  be  received 
by  vessels  which  have  no  occasion  to  visit  the  particular 
city  or  to  come  within  reach  of  the  particular  corporation. 
The  British  government,  therefore,  maintains  the  light- 
houses, but  collects  "light  dues"  in  return,  amounting 
to  about  $2,500,000  yearly,  from  vessels  entering  English 
harbors.  These  dues  pay  the  entire  yearly  cost  of  main- 
taining the  lighthouses  and  about  $250,000  a  year  be- 
sides.1    Here,  also,  is  no  policy  of  subsidizing,  no  attempt 

1  Johnson,  Ocean  and  Inland  Water  Transportation,  p.  262.  If  the  slight 
charge  above  yearly  cost  is  criticised,  it  should  be  remembered  that  a  reason- 
able return  on  investment  is  not  an  improper  aim. 


178     ECONOMIC  ADVANTAGES  OF  COMMERCE 

inland  waterways)  going  long  distances,  railroad  charges 
average  very  much  less  than  this,  probably  markedly 
less  than  a  half  cent.  The  facilities  provided  by  the 
government  on  the  above  mentioned  three  rivers  would, 
therefore,  have  to  reduce  the  transportation  cost  upon 
them  to  zero,  in  order  that  the  construction  or  invest- 
ment by  the  government  should  be  proved  worth  while, 
unless  the  traffic  benefited  moved  an  average  distance 
of  over  6000  miles.  For  even  at  zero  cost  of  carriage, 
each  ton  carried  one  mile  would  secure  a  saving  of  but 
one-half  a  cent.  And  unless  it  were  carried  6000  miles, 
the  total  saving  would  not  amount  to  the  $30  interest 
and  maintenance  cost. 

What  is  the  reason  for  the  numerous  appropriations  of 
this  sort  made  by  our  government  ?  A  partial  explana- 
tion may  be  found  in  the  current  American  practice  of 
donating  to  commerce  the  improvements  made,  and 
letting  the  general  public  bear  the  burden  in  indirect 
and,  therefore,  hardly  realized  taxation.  Commercial 
interests  are  the  more  ready  to  plead  for  comparatively 
useless  dredgings,  revetments,  and  canalizations,  because, 
however  small  the  benefits  are,  they  reap  these  benefits, 
and  because,  however  heavy  the  cost  is,  others  mainly 
bear  it.  Any  reform  which  goes  to  the  root  of  the  evil 
must  espouse  the  principle  of  making  those  contribute 
most  to  the  fixed  charges  and  maintenance  costs  of  navi- 
gation improvements,  who  chiefly  use  those  improve- 
ments and  to  whom  their  benefits  chiefly  go. 

A  further  partial  explanation  is  suggested  by  noting 
the  distribution,  throughout  the  country,  of  money 
appropriated  for  waterways.  In  the  general  River  and 
Harbor  Act  of  19 10,  appropriations  were  received  by  296 
congressional  districts  in  the  United  States,  out  of  a 


ENCOURAGEMENT  OF  TRANSPORTATION     179 

total  of  39 1,1  in  other  words,  by  over  three-fourths  of 
such  districts.  Apparently  the  appropriations  were 
given  to  nearly  every  district  in  which  there  was  a  stream 
or  harbor  offering  any  excuse  for  expenditure.  This 
River  and  Harbor  Act  illustrates  what  has  been  called 
the  "pork  barrel"  system  of  waterway  development. 

The  difficulty  is  one  which  seems  to  apply  generally  to 
the  activities  of  a  democratic  government.  A  despotic 
or  aristocratic  government  is  based  on  the  privilege  of 
special  persons  or  classes.  It  governs  largely  in  the  in- 
terest of  legally  privileged  classes.  It  insures  to  those 
classes,  political  and  economic  privileges  maintained  at 
the  expense  of  others.  Such  a  government  was  that  of 
France  before  the  Revolution.  Such  is  that  of  Russia 
to-day.  In  the  case  of  a  popular  government  and  an  in- 
telligent people,  privilege  is  probably  less  excessive,  and 
its  forms  less  obnoxious.  But  there  may  still  be,  espe- 
cially if  the  government  carries  on  industrial  functions 
or  interferes  at  all  with  the  natural  laws  of  trade,  the 
privilege  which  comes  from  bargaining.  One  class 
wants  a  special  kind  of  tariff  law,  adverse  to  the  public 
interest.  Another  class  desires  legislation  subversive 
of  currency  stability,  also  contrary  to  the  general  wel- 
fare. The  representatives  of  each,  in  Congress,  may 
support  the  desires  of  the  other,  in  return  for  counter 
support. 

The  evil  shows  itself  most  of  all,  perhaps,  through  the 
influence  exerted  by  localities  or  by  special  interests  in 
different  localities.  We  have  noted  this  particularly 
in  the  case  of  the  protective  tariff.2  And  just  as,  in  the 
case   of  the    tariff,   congressional    representatives  from 

1  Fuller,  American  Waterways  and  the  Pork  Barrel,  loc.  cit. 
'Chapter  VI  (of  Part  II),  §6. 


180    ECONOMIC  ADVANTAGES  OF  COMMERCE 

different  states  and  districts  desire,  each,  to  get  or  keep 
a  high  tariff  for  the  goods  produced  in  his  district,  what- 
ever the  effect  on  the  common  weal,  and  sometimes 
inconsistently  with  their  party  platforms,  so  these  repre- 
sentatives desire  appropriations  of  money  to  improve 
waterways,  each  for  his  own  district,  even  though  the  cost 
to  the  country  as  a  whole  far  exceeds  the  benefit,  and 
even  though  each  district  suffers  more  from  its  forced 
contributions  to  improvements  in  other  districts,  than 
it  gains.  There  is,  consequently,  a  process  of  "log- 
rolling," so-called,  in  which  A  votes  for  B's  project  in 
return  for  support  of  his  own ;  and  the  ultimate  result 
is  an  appropriation  or  set  of  appropriations  having  no 
consistency  and  involving  general  loss. 

Each  Congressman  thus  acting,  feels  that  he  is  gaining 
favor  with  his  constituents.  The  persons  interested  in 
local  waterway  constructions  make  representations  to 
him  regarding  the  importance  of  them.  He  feels  that 
the  people  of  his  district  are  not  concerned  primarily  in 
having  him  act  the  part  of  a  wise  and  conscientious 
legislator,  careful  not  to  waste  the  nation's  resources, 
but  that  they  are  concerned  rather  in  having  him  "do 
something"  for  them.  If  he  succeeds  in  getting  what  is 
desired,  the  newspapers  of  the  district  publish  the  fact 
that,  through  his  influence,  Congress  has  been  led  to  ap- 
propriate a  sum  to  improve  navigation  on  the  local  stream 
or  to  deepen  the  local  harbor.  The  fault  is  not  alone 
that  of  the  Congressman  who,  under  such  circumstances, 
does  the  thing  which  he  believes  his  constituents  desire, 
but  is  also  largely  the  fault  of  those  constituents  them- 
selves, whose  selfish  local  interests  overshadow  in  their 
minds  the  greater  interests  of  the  nation  of  which  they  are 
a  part,  and  whose  limited  intelligence  will  not  let  them  see 


ENCOURAGEMENT  OF  TRANSPORTATION     181 

that  the  system  practised  is  likely,  in  the  end,  to  hurt 
more  than  to  help  even  their  own  welfare. 

It  would  seem,  then,  that  a  reform  which  would  go  to 
the  root  of  the  difficulty  must  not  only  insist  upon  the 
attempt  to  charge  users  rather  than  taxpayers,  for  facil- 
ities provided,  but  must  also  insist  that  the  entire  first 
cost  and  risk  of  constructing  these  facilities  shall  not  fall 
upon  the  nation  as  a  whole.  If  government  expenditure 
rather  than  private  investment  is  thought  to  be  necessary 
to  improve  certain  waterways,  at  least  the  government 
expenditure  and  risk  should  be  partly  borne  by  localities 
most  directly  concerned.  If  such  localities  will  not 
support  certain  improvements,  themselves,  they  should 
not  expect  the  nation  to  do  so.  If  the  nation  refuses  to 
bear  the  burden  alone,  but  insists,  always,  upon  local  aid, 
there  will  be  far  less  pressure  for  Federal  appropriations, 
and  many  wasteful  expenditures  will  be  avoided.1 

§7 
Subsidies  to  Railroad  Building 

The  subsidizing  of  transportation,  by  government, 
has  extended,  in  the  United  States  (not  to  mention 
other  countries),  to  railroads  also.  The  railroads  of  the 
United  States  have,  it  is  true,  been  built  pretty  largely 
with  private  capital,  but  they  have  also  received  aid 
from  the  national  government,  from  many  of  the  states, 
and  even  from  county  and  city  governments.  The 
states  and  local  governments,  in  some  instances,  invested 
in  railroad  securities,  so  enabling  the  roads  to  get  capital 

1  Cf.  Preliminary  Report  of  National  Waterways  Commission,  pp.  19,  20 
(Final  Report,  pp.  81,  82).  See  also  Report  of  Commissioner  of  Corporations 
on  Transportation  by  Water  in  the  United  States,  Part  I,  pp.  8,  59,  for  reference  to 
European  practice. 


i82     ECONOMIC  ADVANTAGES  OF  COMMERCE 

which,  perhaps,  private  persons  would  have  been  less 
ready  to  provide.  But  the  Federal  government,  in  addi- 
tion to  making  loans,  made  very  extensive  land  grants  to 
companies  constructing  numerous  desired  lines,1  chiefly 
in  the  less  densely  settled  parts  of  the  country,  the  West 
and  Southwest.  The  grants  made  between  1850  and 
187 1  turned  over  to  the  railroad  companies  about  159 
million  acres  of  the  public  domain,  an  area  exceeding 
five  states  the  size  of  Pennsylvania.2  So  far  as  the  land 
grant  policy  was  based  on  military  conditions,  we  cannot 
judge  it  on  economic  grounds  alone.  But  so  far  as  it 
can  be  regarded  as  a  commercial  policy,  it  can  be  judged 
in  the  light  of  commercial  principles. 

We  shall  not,  of  course,  be  able  to  decide,  absolutely, 
whether  the  land  grants  and  other  government  aid  to 
the  railroads  actually  decreased  the  total  of  national 
wealth.  So  to  decide,  we  should  have  to  know  not  only 
what  has  happened,  but  just  what  would  have  happened 
if  business  and  transportation  development  had  taken 
its  natural  course.  But  we  can  lay  down  general  prin- 
ciples of  usual  application,  which,  in  the  long  run,  are 
apt  to  be  safest  to  follow. 

To  begin  with,  it  must  be  admitted  that  there  is  such 
a  thing  as  undesirable  transportation.  The  labor  and 
capital  of  a  country  should  be  applied  in  order  of  pref- 

1  See,  on  this  subject,  Haney,  A  Congressional  History  of  Railways  in  the  United 
Slates,  Vol.  II.  The  Railway  in  Congress :  1850-1887,  Madison,  Wis.  (Demo- 
crat Printing  Co.,  State  Printer),  1010,  Chs.  II,  III.  Also  Sanborn,  Congres- 
sional Grants  of  Land  in  Aid  of  Railways,  Madison  (Bulletin  of  the  University 
of  Wisconsin),  1899,  Chs.  VI,  VII.  A  good  brief  account  is  in  Johnson,  A  merican 
Railway  Transportation,  2d  revised  edition,  New  York  (Appleton),  1909, 
Ch.  XXII. 

2  Not  including  land  forfeited  by  failure  to  conform  to  conditions.  The 
granting  of  the  mere  rights  of  way  might  be  regarded  as  analogous  to  the  grant- 
ing of  farms  to  actual  settlers.  But  the  granting  of  millions  of  acres  additional 
cannot  be  so  regarded. 


ENCOURAGEMENT  OF  TRANSPORTATION     183 

erence  to  different  industries  according  to  their  relative 
importance,  according  to  the  relative  need  for  them. 
In  other  words,  the  people  should  devote  their  efforts  to 
the  lines  which  pay  best.  It  may  be  said  that  the  people 
living  in  the  Middle  West  and  Far  West,  where  railroad 
building  was  encouraged  by  government  more  than  in 
the  East,  desired  railroads  as  a  means  of  reaching  eastern 
markets.  But  the  mere  existence  of  railroads  leading  to 
markets  does  not  in  itself  mean  greater  prosperity,  since 
the  benefits  so  received  may  be  appreciably  less  than  if 
the  same  capital  were  invested  in  some  kind  of  produc- 
tive enterprise  for  immediate  local  needs.  Unless  the 
trade  made  possible  by  a  railway  brings  as  much  wealth 
and  prosperity  as  could  have  been  had  by  foregoing  the 
trade  and  producing  more  locally,  unless,  that  is,  as 
much  of  desired  wealth  is  produced  by  the  railway  as 
would  be  produced  were  the  labor  and  capital  applied 
instead  to  the  farms  and  ranches,  to  building  houses, 
making  furniture,  etc.,  the  building  of  the  road  is  not 
economy  for  the  community.  If  a  railroad  when  con- 
structed will  yield  the  people  of  a  community  a  benefit 
equivalent  to  what  the  same  investment  would  yield  in 
another  line,  then  those  who  receive  this  benefit  can 
afford  to  pay,  for  the  use  of  the  railroad,  a  proper  return 
on  the  capital  invested.  If  they  cannot  afford  to  pay 
such  a  return,  it  must  be  because  they  are  not  receiv- 
ing a  correspondingly  valuable  service  and,  therefore,  it 
must  be  that  the  capital  invested  in  the  railroad  is  not 
producing  the  value  which  it  might  have  produced  if 
invested  otherwise. 

If  the  territory  through  which  a  railroad  is  desired  is 
sparsely  settled  and  would  offer  but  small  traffic  in  pro- 
portion to  trackage,  thus  only  very  partially  utilizing 


i84     ECONOMIC  ADVANTAGES  OF  COMMERCE 

the  plant  of  the  railroad,  then  high  charges  would  be 
required,  in  order  that  the  railway  plant  might  pay  to 
the  owners  the  average  rate  of  profit  on  investment. 
But  high  charges  may  be  as  serious  preventives  of  reach- 
ing markets  as  absence  of  railroads  leading  to  markets. 
If,  therefore,  only  small  traffic  can  be  hoped  for,  it  may 
be  truer  economy  for  the  territory  concerned  and  the 
various  communities  in  it,  to  be  more  self-sufficient,  to 
depend  more  exclusively  on  natural  waterways,  or  to 
carry  goods  by  using  horses  and  vans,  than  to  build  a 
railroad. 

The  people  of  a  given  section  of  the  country  may 
think  that  they  gain  nothing  by  having  an  incompletely 
utilized  railroad,  if  they  have  to  pay,  in  high  freight  and 
passenger  rates,  interest  on  its  cost.  They  may  not  be 
prepared  to  patronize  such  a  road,  feeling  that  the  ser- 
vice is  not  worth  the  charges.  Yet  if  the  road  is  paid 
for  in  part  by  government  aid,  even  though  they  have  to 
pay  the  taxes  that  make  the  aid  possible,  they  may  de- 
lude themselves  into  thinking  that  they  are  gainers  by 
having  the  railroad.  Nevertheless,  the  people  are  pay- 
ing for  the  service  rendered  just  as  surely  by  this 
method  as  by  the  other,  and  if  it  is  unprofitable  for  them 
to  pay  the  amount  in  the  one  way,  it  is  unprofitable  to 
pay  it  in  the  other.  The  chief  difference  is  that  if  govern- 
ment supports  the  enterprise  without  receiving  any  cor- 
responding return,  the  cost  of  the  service  rendered  is 
paid  for  by  the  people  without  any  regard  to  the  propor- 
tionate benefits  received. 

If  the  assistance  is  by  grants  of  land,  the  essential 
principle  of  the  policy  is  the  same.  The  public  domain 
belongs  to  the  whole  people.  It  rests  with  them  to  give 
it  to  settlers,  to  keep  it  as  forest  reserve  and  for  other 


ENCOURAGEMENT  OF  TRANSPORTATION     185 

purposes,  or  to  secure  money  revenue  by  selling  it.  To 
contribute  it  to  railroad  companies  is  as  much  a  cost  as 
to  contribute  the  equivalent  in  money.1 

As  a  consequence  of  the  land  grant  policy,  capital 
was  diverted  to  transportation  purposes  which  might 
have  yielded  larger  returns  in  agriculture  or  in  manufact- 
ures. In  so  far  as  the  policy  had  this  effect,  it  lessened 
rather  than  increased  national  prosperity.  Because  of 
the  land  grant  policy,  also,  population  tended  to  be  di- 
verted towards  the  Middle  and  Far  West,  while  there 
was  still  room  in  the  East,  South,  and  Central  states. 
As  a  result  of  this  diffusion  of  population,  goods  were 
probably  carried  by  rail  over  longer  distances  than  would 
have  been  necessary  had  population  been  for  a  time 
more  concentrated  and  had  its  extension  westward  been 
more  gradual.  Had  the  westward  movement,  except 
that  by  water  to  the  Pacific  coast,  been  slower,  a  shorter 
connection  could  have  been  kept  by  the  near  frontier 
with  the  more  densely  settled  parts  of  the  country,  and 
the  necessity  of  long  hauls  of  meagre  traffic  through 
undeveloped  sections  could  have  been,  in  part,  avoided. 
It  is  doubtless  true  that  some  sections  of  the  West  are 
exceptionally  rich  and  fertile,  as  some  are  exceptionally 
mountainous  or  arid.  That  the  former  should  event- 
ually hold  a  large  population  was  both  unavoidable  and 
desirable.  But  that  the  movement  westward  should 
have  been  artificially  hastened,  at  the  cost  of  millions 
of  acres  of  the  public  domain,  at  the  cost  of  diverting 
labor  from  other  industries  into  transportation,  at  the 
cost  of  unnecessary  distances  in  transportation,  and  at  the 
cost  of  building  railroads  in  advance  of  traffic,  ought  not 
to  be  too  readily  taken  for  granted. 

1  See,  however,  considerations  later  in  this  section,  especially  in  footnote. 


186     ECONOMIC  ADVANTAGES  OF  COMMERCE 

As  some  parts  of  the  country  presumably  gained  by 
the  policy,  so  other  parts  probably  lost  wealth.  Many 
of  the  eastern  farmers,  for  instance,  found  themselves 
disadvantaged  by  competition  with  producers  of  the 
West.  So  far  as  western  farmers,  by  virtue  of  natural 
advantages,  were  able  to  undersell  the  farmers  of  the 
East,  the  result  was  economical  and  beneficial.  But 
so  far  as  western  farmers  were,  in  effect,  given  bounties, 
by  having  transportation  provided  in  part  at  national 
expense,  the  result  may  very  well  have  been  a  national 
loss.  If  the  prosperity  of  the  government-aided  western 
farmer  was  increased,  that  of  the  eastern  farmer  was 
decreased.  If  the  value  of  western  land  was  raised,  that 
of  eastern  land  was  lowered.1 

One  type  of  municipal  or  local  aid  deserves  particular 
mention.  This  is  aid  which  is  made  conditional  on  the 
choice  of  a  route  through  the  town  or  city  giving  it. 
Such  aid  introduces  an  uneconomical  basis  (from  the 
social  point  of  view)  of  calculation  into  the  choice  of  a 
route.  The  route  selected  is  less  apt  to  be  the  one  which, 
all  matters  of  traffic  and  expense  considered,  is  most 
profitable,  and,  therefore,  socially  most  desirable,  but  is 
apt,  rather,  to  be  a  route  favored  by  the  largest  promises 
of  local  aid. 

1  To  the  argument  that  the  government  so  raised  the  value  of  the  remainder 
of  its  own  land,  it  can  be  answered  that  it  is  not  the  business  of  a  government 
to  depreciate  the  land  of  citizens  in  order  to  raise  the  value  of  public  land.  If 
the  principle  that  land  rent  is  largely  a  social  product  and  belongs  mainly  to 
the  whole  people,  were  commonly  accepted,  depreciating  some  land  to  raise  the 
value  of  other  land  would  appear  clearly  to  be  uneconomical.  It  is  probable, 
in  the  case  under  discussion,  that  enough  railroads  would  soon  have  been  built, 
and  that  the  government,  even  in  the  narrow  sense  here  used,  lost  more  than  it 
gained  by  making  the  grants. 


ENCOURAGEMENT  OF  TRANSPORTATION     187 

§8 

Summary 

Let  us  now  briefly  restate  the  principles  set  forth  in 
this  chapter,  regarding  government  interference  with 
and  encouragement  of  transportation.  Navigation  laws 
were  first  considered.  These  laws  attempt  to  develop 
the  national  merchant  marine  by  excluding  foreign  ships 
from  certain  trade.  The  United  States  excludes  foreign 
vessels  from  the  coasting  trade.  Considered  from  the 
purely  economic  viewpoint,  these  laws  are  analogous 
to  protection,  and  for  similar  reasons  they  are  economi- 
cally undesirable. 

Shipping  subsidies  are  in  the  nature  of  bounties.  In 
general  it  may  be  said  that  they  are  without  economic 
justification.  It  may  be  defensible,  however,  or  even 
desirable,  to  make  definite  payments  to  certain  lines  of 
ships,  in  order  to  have  a  claim  to  vessels  as  naval  reserves. 
Subsidies  may  be  indirect,  as  when  certain  privileges  are 
given  to  a  nation's  own  merchant  vessels,  at  the  tax- 
payers' expense,  which  are  denied  to  the  ships  of  other 
nations.  The  purpose  of  discriminating  subsidies,  direct 
or  indirect,  is  not  so  much  to  increase  commerce  as  to 
have  it  carried  in  vessels  of  the  subsidy-paying  country. 

Facilities  for  transportation  are  frequently  provided 
by  government  at  the  taxpayers'  expense.  These  tend 
to  stimulate  commerce  which  is  not  worth  the  expense 
borne,  and  which  could  not  pay  this  expense.  Such  a 
policy  is  unfair  to  the  general  tax-paying  public  and  vio- 
lates the  principle  that  those  who  gain  by  any  facilities 
should  be  the  ones  to  pay  for  them.  Such  provision  of 
commercial  facilities  at  public  expense  would  have  been 
the  carrying  out  of  the  plan  to  allow  United  States  coast- 


188     ECONOMIC  ADVANTAGES  OF  COMMERCE 

ing  vessels  to  use  the  Panama  Canal  free.  Such  provi- 
sion of  facilities  at  public  expense  is  the  plan  to  have  the 
Erie  Canal  forever  free  from  tolls.  Sections  of  the  country, 
or  of  the  state  of  New  York,  which  have  little  or  nothing 
to  gain  by  the  creation  of  these  facilities,  would  have 
been,  or  will  be,  taxed  that  other  sections  might  use 
them  toll  free.  The  Federal  policy  of  harbor  and  river 
improvement  is  also  a  policy  of  subsidizing  commerce, 
and  is,  therefore,  popular  with  and  favored  by  the  in- 
terests subsidized.  Like  the  protective  tariff  policy, 
the  policy  of  subsidizing  water  transportation  is  partly 
the  result  of  bargaining  between  representatives  of  differ- 
ent districts,  each  trying  to  get  something  at  the  general 
expense.  The  British  system  of  a  Public  Harbor  Trust 
avoids  private  monopoly  of  facilities,  but  makes  the 
traffic  using  the  facilities  provided,  pay  for  them. 

Land  grants  to  railways,  like  other  aids  to  water  trans- 
portation, are  indirect  subsidies  given  to  commerce,  and, 
as  such,  are  open  to  objections.  The  general  rule  which 
it  is  safest  for  government  to  follow,  is  that  those  who 
chiefly  benefit  by  facilities  provided  for  commerce  should 
chiefly  pay  for  them,  rather  than  that  these  facilities 
should  be  paid  for  by  the  people  in  general,  without 
regard  to  proportionate  benefits  received. 


INDEX 


Advertising  value  of  a  nation's  ship- 
ping, 150-160. 

Agriculture,  results  of  a  policy  of  pro- 
tection to,  72-73 ;  fallacious  home 
market  argument  for  protection 
addressed  to  those  concerned  in, 
124-127;  the  argument  for  protec- 
tion to,  in  the  older  countries, 
against  a  doubtful  future,  127-129. 

B 

Bastable,  The  Theory  of  International 
Trade,  cited,  25,  30,  50,  54,  74,  81, 
107,  132. 

Beet  sugar  industry,  bounty  granted, 
in  Europe,  144;  effects  of  bounties 
on  bounty-paying  countries  and  on 
sugar-consuming  countries,  151-152. 

Bounties,  nature  and  effects  of,  144 
ff . ;  as  compared  and  contrasted 
with  protection,  144-145 ;  effect  of, 
on  level  of  money  prices  in  bounty- 
paying  countries,  146-148;  conse- 
quences of,  to  general  welfare  of 
bounty-paying  country  and  of  coun- 
tries with  which  it  trades,  148-152 ; 
effects  on  wages  and  rent,  152-153; 
less  objectionable  than  protection 
for  encouraging  infant  industries, 
153;  comparison  of  shipping  sub- 
sidies and,  157-158. 


Canals,  the  free  use  of  government- 
built,  163,  165-172  ;  comparison  of 
railroads  and,  as  to  economy,  170- 
171 ;  burden  of  building,  borne  by 
taxpayers,  171-172. 

Carver,  views  of,  on  protection,  108  n. 

Coal,  protective  tax  on,  at  expense  of 
wage-earning  public,  99. 


Coasting  trade,  United  States  laws  con- 
cerning, 155 ;  plan  of  granting  free 
use  of  Panama  Canal  to  American, 
165-169. 

Competition,  monopolies  secured 
against  foreign,  by  protective  tariff, 

"3- 

Constitutional  justification  of  a  pro- 
tective tariff,  1 1 2-1 13. 

Cotton-raising  states,  disadvantages 
of  protective  tariff  to,  112. 


Day,  A  History  of  Commerce,  cited,  70. 
Diminishing  utility,  law  of,  28. 
Diversification-of-industries    argument 
for  protection,  134-135- 

E 

Edgeworth,  "The  Theory  of  Inter- 
national Values,"  cited,  21 ;  dis- 
cussion of  view  of,  regarding  effect 
of  import  duty,  48  n.,  107-108  n. 

Employment,  the  argument  that  pro- 
tection makes,  122-124. 

England,  wages  and  prices  in  Germany 
and,  compared,  96;  error  made  in 
comparing  conditions  as  to  wages  in 
United  States  and,  120-122;  weak- 
ness of  national  self-sufficiency 
argument  for  protection  shown  by 
case  of,  136-137 ;  gain  to,  from  ex- 
port bounties  paid  on  beet  sugar  by 
other  countries,  151-152;  early 
navigation  acts  of,  155.  See  also 
Great  Britain. 

Erie  Canal,  the  free  use  of,  an  injustice 
to  taxpayers  of  New  York  State, 
169-170. 

Ethics  of  the  question  of  protection  or 
free  trade,  139. 

Export  duties,  consequences  of,  when 
levied  for  revenue,  52-55 ;   effect  of 


189 


190 


INDEX 


protective,  on  a  country's  trade, 
57-60;  effect  of,  on  flow  of  specie 
and  on  money  prices  in  tax-levying 
country,  60-70. 
Export  trade,  injury  resulting  to  a 
country's,  from  policy  of  protection, 
58-SO. 

F 

Farmers,  a  tariff  for  benefiting  wage- 
earners  at  expense  of,  100-110; 
home  market  argument  for  protec- 
tion addressed  to,  124-127. 

Fisher,  Irving,  Elementary  Principles 
of  Economics,  cited,  5 ;  The  Pur- 
chasing Power  of  Money,  cited,  67. 

Fisk,  International  Commercial  Policies, 
cited,  151. 

Free  trade,  meaning  of,  30-40 ;  advan- 
tages to  countries  adhering  to  prin- 
ciples of,  80-83 ;  wages  and  prices 
under  protection  and,  compared,  96 ; 
condition  of,  between  States  of 
United  States  an  argument  for  suc- 
cessful operation  of,  between  nations, 
137-138.    See  Revenue  tariff. 

Fuller,  Herbert  Brace,  "American 
Waterways  and  the  Pork  Barrel," 
cited,  176,  179. 


Geographical  specialization  in  pro- 
duction of  goods,  8-9;  interference 
with,  under  conditions  created  by  a 
protective  tariff,  62-63. 

George,  Henry,  Protection  and  Free 
Trade,  cited,  120. 

Germany,  comparison  of  wages  and 
prices  in  England  and,  96;  argu- 
ment used  for  protection  to  agricul- 
ture in,  127-129;  beet  sugar  bounty 
in,  151-152;  conclusions  concerning 
waterway  system  of,  171. 

Great  Britain,  advantages  secured  by 
policy  of  free  trade  in,  81-83;  system 
of  harbor  improvement  and  light- 
house maintenance  followed  in, 
174-176. 

H 

Hadley,  Economics,  cited,  122  n. 
Haney,    A    Congressional    History    of 


Railways  in  the  United  States,  cited, 
182. 

Harbors,  uneconomic  improvement  of, 
at  public  expense,  172  ff. ;  British 
system  of  improvement  and  main- 
tenance of,  174-176. 

Harbor  trusts  in  Great  Britain,  174-175. 

Hart,  A.  B.,  Essentials  in  American 
History,  cited,  138. 

Home  market  argument  for  protection, 
124-127. 

I 

Immigration,  danger  to  wages  in 
United  States  from,  rather  than  from 
lack  of  protective  tariff,  121-122. 

Import  duties,  two  classes  of,  39; 
conditions  where,  when  levied  for 
revenue,  the  burden  is  borne  by  the 
levying  country,  41-43;  shifting 
of  burden  by  the  levying  country 
to  another  or  other  countries,  44- 
51 ;  effect  of  protective,  on  a  coun- 
try's trade,  57  ff. ;  unprofitable 
industries  set  up  at  the  general  ex- 
pense by  protective,  60-66.  See 
Protective  tariff. 

Incomes,  loss  in  the  way  of,  resulting 
from   system  of  protection,   68-69. 

Inefficiency,  encouragement  of,  in 
some  degree,  by  protective  tariff,  80. 

Infant  industry  argument  for  protec- 
tion, 129-134;  as  applied  to  boun- 
ties, 153. 

Intercommunity  trade,  11-17;  limits 
to  fluctuations  of,  19  ff. 

Interest,  statement  of  theory  of,  86 ; 
effect  of  protection  on  rate  of,  86-89. 

International  trade,  distinction  be- 
tween intranational  and,  one  of 
degree  only,  16-17. 

Investment,  character  of,  as  a  part  of 
trade,  29  n. 

J 

Johnson,  Ocean  and  Inland  Water 
Transportation,  cited,  173,  175; 
American  Railway  Transportation, 
cited,  182. 

L 

Land  grants  to  railroads,  182-186. 
Land  rent,  laws  of  wages  and,  80-92 : 


INDEX 


191 


effect  of  protection  on   wages  and, 

under    varying  conditions,  93-110; 

effect  of  bounties  on,  152-153. 
Large    scale    production,     protective 

tariff  and,  71-72. 
Levi,  The  History  of  British  Commerce, 

cited,  70. 
Lighthouses,    maintenance    of,    by    a 

central   government,    172,    175-176. 
Lindsay,  History  of  Merchant  Shipping, 

cited  155. 
Loria,   "Effects  of  Import  Duties  in 

New  and  Old  Countries,"  cited,  106. 


M 


Make-work  argument  for  protection, 
fallacy  of  the,  122-124. 

Manfuactures,  consequences  of  policy 
of  protection  to,  73. 

Mason,  "The  American  Silk  Industry 
and  the  Tariff,"  cited,  130. 

Meeker,  R.,  History  of  Shipping  Sub- 
sidies, cited  and  quoted,  145,  159, 
161,  162. 

Military  argument  for  protective  tariff, 
to  insure  national  self-sufficiency, 
I35~i37 ;  for  shipping  subsides,  as 
a  means  of  increasing  a  nation's 
naval  strength,  161-162;  for  build- 
ing Panama  Canal,  168. 

Mill,  J.  S.,  Principles  of  Political 
Economy,  cited,  21,  24,  25,  26,  45, 
46,  52,  74;  System  of  Logic,  cited, 
120. 

Mississippi  River,  unwise  expenditure 
of  money  in  improvement  of,  176- 
177. 

Monetary  standards,  rate  of  inter- 
change of  goods  between  countries 
not  affected  by  difference  in,    24- 

25- 

Money,  fallacy  of  the  argument  for 
protection,  that  it  keeps  money  in 
the  protected  country,  116-118; 
argument  for  shipping  subsidies 
based  on,  158. 

Monopolies,  differing  prices  of  goods  of, 
at  home  and  abroad,  4  n. ;  protec- 
tive system  as  an  encouragement  to, 
113. 

Moulton,  Waterways  versus  Railways, 
cited,  171. 


N 


Naval  reasons  for  shipping  subsidies, 

161-162. 
Navigation  laws,  155-156;    analogous 

to  protective  tariffs,  156-157. 


Panama  Canal,  question  of  indirect! 
subsidizing  American  ships  by  al 
lowing  them  free  use  of,  [63;  lai  - 
of  economic  justification  for  plan  of 
allowing  American  coasting  trad'- 
free  use  of,  165-169. 

Parasitic  industries,  establishment  of, 
by  protective  tariff,  60-66. 

Patten,  Economic  Basis  of  Protection, 
cited,  106. 

"Pauper  labor"  argument  used  by 
protectionists,  1 19-120. 

Politics,  part  taken  by.  in  the  protec- 
tion of  infant  industries,  132-133; 
operation  of,  in  American  waterway 
development,  178-181. 

Population,  density  of,  and  rate  of 
wages,  120-121. 

"Pork  barrel"  system  of  waterway 
development,  1 78-1 81. 

Prices,  tendency  of,  through  influence 
of  trade,  toward  equality  in  dif- 
ferent countries,  3-7  ;  tendency  of, 
to  be  lower  in  the  country  where 
goods  can  be  produced  with  greatest 
relative  advantage,  7-1 1  ;  high  rate 
of  wages  docs  not  imply  high,  9 ; 
effects  of  protective  tariff  on,  67- 
70,  74-78;  effect  of  bounties  on 
level  of,  in  bounty-paying  countries, 
146-148;  effect  of  artificial  naviga- 
tion laws  on,  156. 

Protection.     See  Protective  tariff. 

Protective  tariff,  distinction  between 
revenue  tariff  and,  39-41 ;  effect 
of,  on  a  country's  export  trade,  57- 
60;  how  unprofitable  industries 
are  set  up  at  the  general  expense  by, 
60-66;  view  of,  as  "mutual  tribute," 
64 ;  effect  of,  on  money  pri<  M  1  1 
protected  and  of  unprotected  goods, 
67-70;  improbability  of  increase  of 
national  wealth  by,  71  n. ;  opa 
of,  as  to  industries  in  which   largr 


192 


INDEX 


scale  production  is  advantageous, 
71-72;  applied  to  industries  of  in- 
creasing cost,  72-74;  effect  on  cost 
of  unprotected  goods  got  from  other 
countries,  74-78;  chimerical  prop- 
osition as  to  establishing  a  tariff 
"equal  to  the  difference  in  cost  of 
production  at  home  and  abroad, 
together  with  a  reasonable  profit," 
79-80;  not  necessarily  conducive 
to  efficiency  in  methods  of  produc- 
tion, 80;  relative  advantages  in 
world's  commerce  of  countries  hav- 
ing high  and  countries  having  low 
or  no  tariffs,  80-83 ;  effect  on  rate 
of  interest  and  therefore  on  wages, 
86-89;  effect  of,  on  wages  and  rent 
under  varying  conditions,  97-1 10 ; 
may  benefit  one  section  of  a  coun- 
try at  the  expense  of  other  sections, 
111-113;  as  an  encouragement  to 
monopoly,  113;  the  argument  for, 
that  it  keeps  money  in  the  protected 
country,  116-118;  the  wages  argu- 
ment for,  1 18-122;  the  make- work 
argument,  122-124;  the  home 
market  argument,  124-127;  the  in- 
fant industry  argument,  120-134; 
diversification  of  industries  argu- 
ment, 134-135 ;  argument  concern- 
ing national  self-sufficiency,  135- 
137 ;  successful  working  of  free 
trade  between  States  of  United 
States  an  argument  against,  137- 
138;  ethical  considerations  bearing 
on  question  of,  139;  bounties  as 
compared  and  contrasted  with, 
144-145 ;  analogy  between  navi- 
gation laws  and,  156-157;  points  of 
similarity  of  shipping  subsidies  and, 
I57-I58- 

R 

Railroads,  comparison  of  canals  and, 
as  to  economy,  170-172 ;  comparison 
of  transportation  costs  on  rivers  and, 
177-178;  subsidies  to  building  of, 
181-186;  error  made  in  giving 
municipal  or  local  aid  to,  186. 

Railroad  wages,  study  of,  96  n. 

Rate  of  interchange  of  goods  between 
communities,  19  ff. ;  determination 
of,  by  conditions  of  supply  and  de- 


mand, 22-25;  effect  on,  when  one 
country  offers  a  variety  of  goods, 
26-27 ;  effect  when  one  country 
receives  periodic  payments  of  obli- 
gations from  another,  27-29;  ef- 
fect of  production  in  any  country 
under  conditions  of  different  cost, 
29-32;  under  conditions  involving 
more  than  two  countries,  32-35 ; 
tariffs  and,  39  ff  ■ 

Rate  of  interest,  effect  of  protection 
on,  86-89. 

Rent.    See  Land  rent. 

Revenue  tariff,  39  ff . ;  conditions 
under  which  it  is  borne  by  the 
levying  country,  41-43 ;  shifting  of 
burden  by  the  levying  country  to 
another  or  other  countries,  44-51 ; 
consequences  of  a,  on  exports,  52- 

55- 
Rivers,   uneconomic  improvement  of, 
by  United  States,  176-181. 


Sanborn,  Congressional  Grants  of  Land 
in  Aid  of  Railways,  cited,  182. 

Schiiller,  Schutzzoll  und  Freihandel, 
cited,  124. 

Self-sufficiency,  argument  for  protec- 
tion in  order  to  get  and  maintain 
national,  135-137- 

Shipping,  navigation  laws  designed  to 
encourage,  155-157;  advertising 
value  of,  150-160. 

Shipping  subsidies,  144;  shown  to  be 
without  economic  justification,  157- 
162;  naval  reasons  for,  161-162; 
indirect,  favoring  native  ships  as 
compared  with  foreign  ships,  163- 
165. 

Sidgwick,  views  of,  on  protection, 
107  n. 

Silk  industry  in  United  States,  an  ex- 
ample of  infant  industry  argument, 
130. 

Smith,  The  Organisation  of  Ocean 
Commerce,  cited,  174. 

Southern  states,  effect  of  protective 
system  on  the,  112. 

Subsidies,  to  shipping,  144,  157-165; 
to  railroad  building,  181-186. 


INDEX 


i93 


Sumner,  William  Graham,  Protec- 
tionism, cited,  61,  82,  126,  136,  152; 
quoted,  64,  65,  134. 

Supply  and  demand,  conditions  of, 
determining  rate  of  interchange  of 
goods  between  countries,  22-25. 


Tariffs,  effect  of,  on  location  of  in- 
dustries, 1 1 ;  revenue  and  protec- 
tive, distinguished,  30-41.  See  Pro- 
tective   tariff    and   Revenue    tariff. 

Taussig,  Principles  of  Economics, 
cited,  7,  23,  27,  74,  in,  127. 

Trade,  conditions  governing  intercom- 
munity, n-16;  international  com- 
pared with  intranational,  16-17; 
conditions  regulating  rate  of,  be- 
tween communities,  19  ff. ;  supply 
and  demand  as  the  determining 
factor  in,  22-25;  effect  on  rate  of, 
when  one  country  offers  a  variety 
of  goods  and  when  it  receives  periodic 
payments  of  obligations  from  the 
other,  26-29;  influence  of  produc- 
tion in  any  country  under  conditions 
of  different  cost,  29-32;  effect  of 
entrance  of  an  additional  country 
into,  32-35  ;  cost  of  transportation 
as  related  to,  36;  revenue  tariffs 
and,  39-56;  effects  of  a  protective 
tariff,  57  ff.  See  also  Rate  of  inter- 
change of  goods. 
'Trade  follows  the  flag"  argument  for 
shipping  subsidies,  159. 


Transportation,  cost  of,  as  related  to 
trade,  36 ;  navigation  laws  and 
shipping  subsidies  for  encourage 
ment  of,  by  water,  155  ff. ;  com- 
parison of  railroads  and  canals  for 
purposes  of,  170-172;  comparison 
of  cost  of,  on  railroads  and  on  rivers, 
177-178. 

V 

Variety  of  goods,  advantages  to  coun- 
try offering,  for  export,  26-27. 


W 


Wages,  high  rate  of,  does  not  imply 
that  goods  cannot  be  produced  and 
exported  at  low  money  cost,  9 ; 
reduction  of,  resulting  from  rise  in 
rate  of  interest  due  to  protective 
policy,  88-89;  laws  of  wages  and 
land  rent,  89-92 ;  effect  of  protec- 
tion on,  when  protected  and  un- 
protected goods  are  produced  under 
conditions  of  substantially  constant 
cost,  93-96;  effect  of  bounties  on, 
I52-I53- 

Wagner,  Adolph,  Agrar-  and  Indus  - 
trieslaat,  cited,  127. 

Weighted  average,  defined,  5. 

Wheat-producing  areas,  disadvantages 
of  protective  tariff  to,  112. 

Wool  industry,  protective  tariff  and,  in 
United  States,  61  ;  an  illustration 
of  the  establishment  of  a  parasitic 
industry  at  the  general  expense,  05, 
99-100. 


Printed  in  the  United  States  of  America. 


